The U.S. House Committee on Financial Services released a full and detailed report of a year-long investigation into what it dubbed the January 2021 Meme Stock Market Event (MSME). are said to be concerned about the role of market makers in trading stocks such as GameStop (EMG) – Get the GameStop Corporation report, AMC Entertainment (CMA) – Get the AMC Entertainment Holdings Inc. Class A Report.and other meme games.
Figure 1: GME and AMC: lawmakers concerned about the role of market makers
United States House Financial Services Committee
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Market makers are a key issue
Since the January 2021 event, the committee has held a series of virtual hearings titled “Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide.”
During the hearings, concerns were raised about the unbalanced concentration of trade execution by market makers.
The main concern is the fact that over 40% of trades in the US have been executed by a single market maker. According to Chairman Maxine Waters, the trading strategy of some market makers “is designed intentionally to undermine market transparency and skim profits from companies and other investors.”
Another concern is that market makers may trade ahead of their clients due to access to unexecuted orders. This way, market makers can profit from anticipating a security’s movement with this first-hand data.
Finally, there is concern that large market makers will benefit from the structural advantages of the market, primarily due to their importance in maintaining market functioning and trading activity.
Where are retail investors?
According to Dennis Kelleher, president and CEO of Better Markets, retail investors end up getting the “worst deal” of these advantages that market giants have based on current market structures. Kelleher went on to say that only by balancing and creating a more transparent and fair system can retail investor confidence rise again.
SEC Chairman Gary Gensler pointed out the ban on trading ahead of a client order and also said that the pay-per-order flow (PFOF) model allows one or two market makers to dominate the trading market. Retail. And that can give these entities competitive advantages over the rest of the market, namely retail investors.
Recently, the SEC proposed trading rules to review practices such as PFOF and ensure greater competitiveness among wholesale market makers. The order-by-order trading proposals, if adopted, can promote greater transparency in trading. In addition, new measures such as stricter requirements for brokers on data such as monthly summaries of price movements would be made available for the benefit of retail investors.
The “monkeys” turn to direct recording
GameStop and AMC shareholders (aka the “Monkeys”) have pledged through their social media communities and boardrooms to “protect” the influence of any questionable practices on their preferred stocks.
Even though the entire Meme stock event is being debated at high legislative levels, GameStop and AMC investors are skeptical of the market structures and have chosen to directly register their shares through the direct registration system. (DRS). This allows them to avoid having their shares in the custody of a brokerage firm.
This way, in theory, shareholders would be protected from trading stops, having their shares lent to short sellers or placed in the hands of market makers. GameStop reported at the end of April, 12.7 million of its ordinary shares had already been registered with a major transfer agent, ComputerShare.
(Disclaimer: This is not investment advice. The author may own one or more stocks mentioned in this report. Additionally, the article may contain affiliate links These partnerships do not influence editorial content. Thank you for supporting Wall Street Memes)
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