During the meme frenzy of January 2021, the trading of GameStop (GME) - Get GameStop Corporation Report and other meme stocks was halted due to their high volumes and levels of volatility. Now, more than a year later, the U.S. Securities and Exchange Commission (SEC) is punishing commission-free broker TradeZero and its co-founder due to false statements made at the time.
Here's what investors need to know.
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TradeZero America Fined by the SEC
The SEC has fined TradeZero and its co-founder Daniel Pipitone $100,000 and $25,000 respectively, due to false statements about not restricting trading activity in meme stocks in January 2021.
Pipitone was trying to promote TradeZero to investors as an exception among other brokers who were ordered by clearing firms to block meme stock trades.
According to Pipitone, the statement provided by him during an "Ask Me Anything" Reddit post mentioned that trading firms that blocked GameStop and AMC (AMC) - Get AMC Entertainment Holdings Inc. Class A Report were "disgusting."
According to the SEC, the punishment of TradeZero reinforces a message that participants in the capital markets cannot be exploited in turbulent times: "The SEC has been committed to ensuring that our capital markets continue to function in times of uncertainty, and today's action highlights this commitment."
The January 2021 Meme Stock Trading Halt
At the time, many meme stock investors blamed several brokers, including Robinhood (HOOD) - Get Robinhood Markets Inc. Report, for blocking the insane trading activity. However, the truth is that trading halt caught brokers off-guard.
Securities deals and transactions depend on the intermediary Depository Trust and Clearing Corporation (DTCC), which acts as a rate tracker and a counterparty for most transactions in the market. DTCC provides a calculation of cash margin requirements for securities that are used by clearing firms to determine margin requirements for brokers, allowing them to have an idea of how much cash in hand they have. Thus, the higher the market volatility for a given security, the clearing firm can charge more to seal the trades.
This explains why the trading activity in GME and other meme stocks was halted by several brokers, such as Robinhood and TradeZero.
Robinhood ended up releasing a statement later explaining what happened to its customers in more detail:
"It was not because we wanted to stop people from buying these stocks. We did this because the required amount we had to deposit with the clearinghouse was so large-with individual volatile securities accounting for hundreds of millions of dollars in deposit requirements-that we had to take steps to limit buying in those volatile securities to ensure we could comfortably meet our requirements."
GameStop Stock Was Recently Halted Once Again
In late March, during the latest meme stock rally, the trading of GameStop's stock — as well as AMC — was briefly halted on the NYSE due to "trading amid heightened volatility and larger-than-usual pre-market volumes."
At the time, GameStop Chairman Ryan Cohen had bought an additional 100,000 shares, which caused a buzz among GameStop investors. The halt put an end to a rally of over 140% between March 14 and March 29.
However, these recent halts raise the question whether brokers are still unprepared for high volatility like we saw with meme stocks last year. The fact that brokers have failed to meet the deposit requirements of clearing houses backs that idea up.
(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)