By Katanga Johnson and John McCrank
WASHINGTON (Reuters) -Wall Street regulators must do more to address market risks highlighted by the “meme-stock” trading frenzy of January 2021 that pitted individual GameStop Corp investors against powerful hedge funds, a congressional report said Friday.
Meme stock trading — where companies see their value fueled more by social media attention than fundamentals continues — with cosmetics maker Revlon Inc the latest example.
The report by the U.S. House of Representatives’ Financial Services Committee singled out Robinhood’s trading app for “troubling business practices” and urged regulators to step up scrutiny of retail brokers.
Robinhood said there was “nothing new” in the report, that it took “the appropriate and responsible steps necessary to protect and support our customers” and has made significant improvements since then.
The report, which raises pressure on regulators to do more, also called for new brokerage liquidity rules and for regulators to hasten a crackdown on the “gameification” of trading — game-like features that prompt users to trade more.
“The meme stock saga has raised questions about how retail trading market infrastructure currently operates and whether it is appropriately designed and regulated,” the report said.
The report, which was prepared following hearings in February 2021, analyzed how quickly money was made and lost when GameStop shares surged more than 1,600% in January last year before collapsing.
During the GameStop episode, retail investors banded together in online forums to push up the stock’s price and force hedge funds that shorted or bet against it, to unwind their trades.
The panel did not cast blame but instead proposed tightening regulatory gaps. The report called for the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), Wall Street’s self-funded watchdog, to craft new rules to address what it called “a culture that prioritizes growth above stability.”
Specifically, the panel recommends the SEC introduce a liquidity rule for clearing brokers, and for FINRA to establish a framework governing liquidity planning for clearing brokers, rather than the current voluntary guidance.
Both FINRA and the SEC, which have stepped up scrutiny of “gameification,” should also bolster regulations curbing the extension of margin trading to customers, the report said.
FINRA, in response, said in a statement that it had taken steps to protect investors and implemented a new rule that improves its ability to monitor the liquidity risk of members with the largest exposures.
It said it also seeking comment on member firm practices involving complex products and options, as well as short sales.
The SEC declined to comment.
SEC Chair Gary Gensler, whose agency also last year issued a report https://www.sec.gov/page/sec-staff-release-gamestop-report#:~:text=The%20Securities%20and%20Exchange%20Commission,several%20questions%20about%20market%20structure on the GameStop saga, has said the agency would address gameification, PFOF and short selling disclosures.
(Reporting by Katanga Johnson and John McCrank; additional reporting by Michelle Price; Editing by Megan Davies, Jonathan Oatis and Deepa Babington)