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Author Topic: Factbox-The SEC's response to the 'meme stock' rally  (Read 22 times)
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June 28, 2022, 11:55:11 PM
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(Reuters) - A year-and-a-half after a "meme stock" rally roiled Wall Street, the U.S. Securities and Exchange Commission is considering broad changes to curb the frenetic trading of stocks based on social media activity.

The proposed overhaul would be the biggest change to Wall Street's rules since 2005 and would affect nearly every corner of the market, from commission-free brokerages to market makers and exchanges.

The U.S. House Committee on Financial Services on Friday called for the SEC, along with other regulators, to do more to protect the markets from similar events.

The impetus for change came from the so-called "Reddit rally" of January 2021, in which GameStop Corp and other "meme stocks" popular on social media surged to extreme highs on buying from investors trading heavily through Robinhood and other commission-free retail brokerages.

The intense volatility led to big losses for hedge funds that had bet against the meme stocks.

It also led Robinhood and others to restrict trading in the affected securities, in turn curbing the rally, infuriating retail investors and rattling market confidence.

Here are some of the issues the SEC is scrutinizing:

PAYMENT FOR ORDER FLOW

Gary Gensler, the SEC chief, has criticized payment for order flow (PFOF), a practice in which some commission-free brokers generate revenue by sending customer orders to wholesale market makers in return for payments, rather than to exchanges.

He has said a ban on the practice is not off the table as it raises potential conflicts of interest, giving brokers incentives to encourage customers to trade more frequently to maximize the payments.

The meme stock trading frenzy exposed concerns about the ways in which PFOF increases complexity and potential fragility in the securities markets, the House Financial Services Committee report said.

Proponents say PFOF is a major reason brokerages were able to stop charging trading commissions, and retail investors often get a lower, better price than they would on the main exchange.

DIGITAL TRADING PROMPTS

Gensler has criticized the "gamification of trading" in which commission-free brokerages encourage excessive trading using lights, noises, notifications and other gimmicks to generate more PFOF.

He has also highlighted the use of artificial intelligence, predictive data analytics and machine learning to push products.

In August https://www.reuters.com/legal/transactional/us-markets-regulator-wants-public-feedback-firms-digital-engagement-practices-2021-08-27 2021, the SEC issued a consultation on potential new rules to limit gamification and other "digital engagement prompts." The agency is expected to proceed with a rule change https://www.reuters.com/business/finance/will-games-stop-sec-mulls-crackdown-trading-apps-2022-01-26 in the coming months.

The U.S. House Financial Services Committee on Friday urged Congress to adopt legislation mandating the SEC study how its rules need to change to address new technological developments, such as digital engagement practices and social media-driven market activity.

CONCENTRATION, PRICING

The GameStop saga highlighted the small number of market-makers -- brokers that execute trades and publicly post buy and sell quotes for others to trade -- that dominate the retail market, which may pose competition issues, Gensler has said.

The House Financial Services Committee said that at the time of the Reddit rally, Robinhood was not connected to any exchanges, and of the six market makers Robinhood routed all its customers' orders to, nearly all were unable to execute trades in certain meme stocks due to the market stress.

"Had all these market makers been unable to execute trades, Robinhood would have been unable to execute trades on behalf of its customers," the report said.

Nearly all retail trades are executed away from exchanges.

That is partly due to rules that allow market makers to offer fractional sub-penny price improvement on bids and offers, whereas exchanges have to quote in pennies.

Gensler has said that has created an uneven playing field in the competition for retail orders.

Gensler has asked SEC staff to recommend potential changes to harmonize the ability to display sub-penny quotes on and off exchange.

(Reporting by John McCrank in New York and Katanga Johnson in Washington, Editing by Deepa Babington)



https://finance.yahoo.com/news/factbox-secs-response-meme-stock-185020859.html


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The SEC proposes to crackdown on coordinated retail trading.

If this is passed, could the fallout affect the numerous pump and dump cycles we have witnessed in altcoins over the years? Alt pump and dumps being essentially the same concept perpetuated by larger traders. Hedge funds and investment banks may also follow similar planning cycles. Although their trades are defined more by backroom discussions and conferences on what market prices could resemble, rather than being purely profiteering in origin.

This seems like a topic that could be controversial. Some will hate the degree to which US markets are regulated. US citizenship renouncement could climb higher. With many deciding to immigrate outside the united states to regions with lower income taxes and more lax financial reporting standards.

This appears to be flying beneath the radar at the moment. Its not receiving much attention from the media or internet influencers. It seems to me to be one of the bigger pieces of regulation the SEC has attempted in recent years.

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June 29, 2022, 12:37:17 AM
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it reads to me that they want to stop the sub penny trading of split shares

and stop the sub markets(dark pools) that trade off the main markets.
in short forcing people to only buy whole shares from the main market using the compliance licenced agents/brokers

if you do research it also leads into closing the "dark pools" which would actually get some backlash as although they were used by robinhood. they are also used by wall street


i do laugh how they say
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encourage excessive trading using lights, noises, notifications and other gimmicks to generate more PFOF.

well for decades now.. wall street had the CNBC "mad money" red button and sound effects guy pretending to be an analyst

I DO NOT TRADE OR ACT AS ESCROW ON THIS FORUM EVER.
Please do your own research & respect what is written here as both opinion & information gleaned from experience. many people replying with insults but no on-topic content substance, automatically are 'facepalmed' and yawned at
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June 29, 2022, 02:05:06 AM
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I wonder if any of this has something to do with the 122% short of gme stock or whether that's just gone ignored as not a problem...

I have accounts open both with exchanges and with places like Robinhood and exchanges have fees (and they can seem quite high too of you're wanting to diversify and not buy a fund).

The market makers were a part of RH's business model and this might've been why it was IPO'd when it was too...

There are/were communities that did this sort of thing (pump) on "word of mouth" bases too - I say pump because a lot of them were stocks generally picked to be undervalued or that the people in these communities actually expected to do well (if you're in a small community, you'd do better telling someone legitimate information and having them share a cut with you or just not telling them again if they don't).

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