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GameStop Stock: What To Do After The SEC Report

The SEC has investigated trading activity in GameStop and drew conclusions that surprised some investors. Wall Street Memes discusses what happens next for GME stock.

GameStop stock  (GME) - Get GameStop Corp. Class A Report has experienced quite a bit of volatility in the past few weeks. The recent SEC report shed light on GME trading activity in January 2021 and the forces behind the stock having skyrocketed to a high of around $350 per share in Q1.

Figure 1: GME stock chart.

Figure 1: GME stock chart.

Wall Street Memes offers an overview of the SEC’s findings and discusses what may lie ahead for GME traders and “hodlers”.

What the SEC has said

The SEC report aimed at clarifying fundamental questions about the GME episode, in January. In the study, several questions about the structure and functioning of the markets were raised. Chair Gary Gensler summarized the SEC’s main objective:

"January's events gave us an opportunity to consider how we can further our efforts to make the equity markets as fair, orderly, and efficient as possible."

Contrary to what many GME investors and other meme stock traders originally thought, the SEC concluded that price moves were not fully explained by short covering. Also, the infamous hedge fund managers participated in the buying spree, precisely the opposite of what had been discussed on the main Reddit discussion boards.

According to the SEC, what caused GME stock price to swing wildly were a confluence of many factors, including: (1) frequent Reddit mentions, (2) significant coverage in the mainstream media, (3) large volume changes and, sure, (4) elevated short interest.

However, the SEC mentioned that it is still identifying “areas of market structure and regulatory framework for potential study and additional consideration”. These include (1) forces that may cause a brokerage firm to restrict trading; (2) digital engagement practices and PFOF, i.e. payment for order flow; (3) dark pool trading; and (4) the market dynamics of short selling.

Popularity was key

As a recap of the SEC’s report, large volume changes leading to outsized price moves were the root cause behind the GME frenzy. The chart below shows that the number of individual accounts trading GME increased from 10,000 at the beginning of January to 900,000 at that month’s peak.

Interestingly, mostly of these individual accounts had an average customer age of 31 years old and a median balance of $240, according to Robinhood.

Figure 2: Daily count of unique CAT accounts trading GME, by type January 2021.

Figure 2: Daily count of unique CAT accounts trading GME, by type January 2021.

Shorting activity and possible market irregularities are still factors that the SEC has committed to following up on. However, it looks like increased popularity may have been the most relevant piece of the puzzle behind the spike in GameStop stock price.

What next?

Should the above about GameStop stock be true, the path “to the moon” will probably depend on a few catalysts materializing next. We believe that those are:

  1. A bullish spark: positive news would probably need to surface to put the ticker back on top of the popularity charts on Reddit and other discussion boards. These developments could range from business fundamentals to broad market sentiment to a revival of meme mania.
  1. FOMO kicks in: early-stage bullishness could catch the attention of “the apes”, who may then be more encouraged to open or increase their long positions in GME. Buzz and FOMO (fear of missing out on a possible rally) could help to build momentum from there.
  1. Diamond hands do “their jobs”: for the stock to go “to the moon”, overwhelming demand for GME is probably needed – i.e., a wave of extremely loyal and united diamond-hand “hodlers” willing to pay well beyond what most would consider reasonable for the stock.

Twitter speaks

The SEC has recently reported that trading activity in GameStop stock was driven primarily by popularity leading to large volume changes, and not by short covering. What do you think of the report’s conclusions?

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)