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SEC says GameStop’s wild stock surge was not short covering

Market Insider | Shalini Nagarajan | Oct 19, 2021

gamestop - SEC says GameStop's wild stock surge was not short coveringThe Securities and Exchange Commission published a long-awaited report on Reddit darling GameStop's retail-trading frenzy on Monday, saying the phenomenon was caused by a rapid rise in investor accounts betting on the stock.

"Whether driven by a desire to squeeze short sellers and thus to profit from the resultant rise in price, or by belief in the fundamentals of GameStop, it was the positive sentiment, not the buying-to-cover, that sustained the weeks-long price appreciation of GameStop stock," the regulator said.

In its 44-page report, the SEC debunked the theory that a "short squeeze" may have sent shares of GameStop and other meme stocks soaring. While many short sellers were forced to cover their short positions, the agency said, there is no evidence that this narrative was a major factor.

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GameStop purchases by those covering their short positions were a "small fraction of overall buy volume," and the share price continued to stay high after the direct effects of such covering would have waned, the SEC said.

Here are 5 takeaways from the report:

GameStop's rally was driven by 880,000 new investors trading the stock in January

"By January 27, the number of unique accounts trading GME on a given day increased from less than 10,000 at the beginning of the month to nearly 900,000."

Hedge funds remained largely unscathed

A handful of hedge funds including Gabe Plotkin's Melvin Capital lost billions of dollars over their bearish bets against GameStop. But the SEC said these firms were not badly affected.

"Staff believes that hedge funds broadly were not significantly affected by investments in GME and other meme stocks. Staff did not observe that any advisers to private funds and registered funds experienced liquidity issues or difficulties with counterparties," the regulator said.

Few clues on change to market-structure rules

The agency didn't provide specific policy recommendations. It did say that the events call for a review of the factors that made brokerages restrict trading, digital engagement practices, dark pools and market makers, and short-selling. Chair Gary Gensler has previously pointed to payment for order flow and "gamification" of trading as coming under the SEC's scrutiny.

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