What the SEC May Have Missed in Its Report on ‘Meme Stock’ Volatility

The seal of the U.S. Securities and Exchange Commission (SEC) is seen at their headquarters in Washington, on May 12, 2021. Andrew Kelly/Reuters

The U.S. Securities and Exchange Commission issued a report earlier this month suggesting brokers—via gamified user interfaces and mechanisms such as payment for order flow—lured investors to increase their trading, which, in turn, resulted in higher revenues.

Context

The SEC report comes after a wave of speculative commentaries on online forums like WallStreetBets earlier this year in which market participants fueled a rise in the volume and share prices of popularized meme stocks.

The report closely examined trade in GameStop Corporation.

Shares of the stock rose as high as $513 premarket in late January 2021, after which, due to the risk management of clearing agencies, numerous brokers limited trades.

This resulted in synthetic imbalances and a move lower in price.

Findings

Amid a rebellion against short-selling professional investors—evidenced by a short interest in GameStop, as a percentage of float, as high as 123 percent—the narrative months ago was that the meme stocks experienced a short squeeze.

That’s opposite to what the SEC’s report suggests: it said that although “the run-up in GME stock price coincided with buying by those with short positions, buying was a small fraction of overall buy volume.”

In the SEC’s analysis of the options market, there was no evidence of a gamma squeeze.

“[T]his increase in options trading volume was mostly driven by an increase in the buying of put, rather than call, options. Further, data show that market-makers were buying, rather than writing, call options.”

Conclusions

The SEC’s conclusion on the role options played during the near-vertical price rise in stocks like GameStop may be flawed, according to SpotGamma founder Brent Kochuba.

Kochuba said he believes retail investors aggressively bought stock and short-term call options, initiating a gamma squeeze. Thereafter, options volatility and prices rose dramatically, pricing out retail. That’s when institutional investor flow came to dominate.

SpotGamma’s data suggests that a gamma squeeze transpired in two stages:

• The first was the result of significant call buying on the part of retail participants.
• Later, institutional participants sold to open put options.

Both of these actions resulted in a so-called short-gamma environment, leading counterparties to buy stock into the price rise. This exacerbated underlying price movements.

By Renato Capelj

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