Last week, the Securities and Exchange Commission (“SEC”) released its long-awaited report formally debriefing the events that transpired during the January and February 2021 meme stock craze. The 44-page report, titled “Staff Report on Equity and Options Market Structure Conditions in Early 2021” provides SEC staff’s analysis of the mechanisms behind the meme stock phenomenon, ultimately debunking a few theories made popular over social media and other media outlets as the events unfolded.
By way of a brief overview, in January 2021 a group of about 100 stocks experienced monumental price and trading volume fluctuations. These stocks, many of which were consumer-centered companies with high brand awareness, gained rapid attention over social media platforms like Reddit and YouTube.
While the SEC’s report addresses the events and impacts of the meme stock phenomenon broadly, it focuses the bulk of its analysis around GameStop Corp (“GME”), arguably the most famous of the meme stocks.
The report notes that five factors – large price moves, large volume changes, large short interest, frequent Reddit mentions, and significant mainstream media coverage – all converged around GME in late January 2021.
In 2020, GME’s stock price swung substantially, starting the year at around $6 per share before falling to $3 in April and then rebounding to reach about $20 per share by the end of the year. 
Then, when Ryan Cohen, the co-founder of the popular pet-focused e-commerce company, Chewy, Inc., announced he would be joining GameStop’s board of directors on January 11, 2021, the stock took off. While GME traded at $20.65 per share that day, its rose to a high of $347.51 per share by January 27th. Along with these price increases came similar increases in volume. Trading volume from January 23-29 averaged 100 million shares trader per day, more than 1,400% higher than average daily trade volume during 2020. 
As this market volatility unfolded, perspectives on its driving force into two main camps – those who touted GME as a prudent, even undervalued, investment because of its potential to break into the e-commerce market, and those who felt short interest was fueling the moves.  As social media users focused their attention on short interest from large institutional investors like hedge funds, a “short squeeze” on GME was triggered. The Reddit retail investors viewed themselves as fueling GME’s price increases, forcing hedge funds to close out their short positions at significant losses.
However, as GME and other meme stocks skyrocketed, some app-based trading platforms popular among retail investors placed temporary restrictions on trading in these stocks. The platforms cited various reasons for these restrictions, including margin calls from clearing agencies to cover increased risk. Conversely, retail investors believed that the restrictions were put in place in response to pressure from hedge funds with short positions at risk of losing money – claims that made their way to a Congressional hearing in February.
The SEC’s report ultimately provides a few important takeaways for the investing public. First, the report notes that it was “positive sentiment” about GME – whether a legitimate belief in GME’s fundamentals or a desire to profit from a rise in price – that fueled the sustained appreciation of GME’s stock price, not short-sellers who were “buying-to-cover.”  In fact, the report quite succinctly noted that “[s]taff believes that hedge funds broadly were not significantly affected” by the run on GME. 
Furthermore, the report also briefly touched on the rationale behind trading restrictions enacted by broker-dealers like Robinhood, noting that it had found evidence that clearing agencies had indeed demanded to be paid billions in additional margin by their member firms to account for volatility risks. 
The report concluded with four areas targeted for further study and consideration, noted as the following:
- Forces that may cause a brokerage to restrict trading
- Digital engagement practices and payment for order flow
- Trading in dark pools and through wholesalers
- Short selling and market dynamics. 
Each of these areas falls squarely within the ambit of SEC Chairman Gary Gensler’s already stated policy goals, inherent in his aim of promoting a more “fair, orderly, and efficient” market in the United States.  While the report did not outline specific improvements to be made, it serves as an important starting point for potential policy changes for protecting retail investor interests moving forward.