The House Financial Services Committee finally released its report on its year-long investigation into popular meme stocks like GameStop (NYSE:GME) and AMC (NYSE:AMC). The report concluded that trading in the two stocks on Robinhood (NASDAQ:HOOD) created significant risks for the platform and for its market makers.
Savvy investors will likely remember the rise of GME and AMC stocks during the first quarter of last year. Hedge funds faced heavy losses after GameStop soared to unimaginable levels, which forced Robinhood to enact trading restrictions on several meme stocks.
Before the restrictions were enacted, the dollar value of GME holders on Robinhood was $2.6 billion. After the restrictions were enforced on Jan. 28, that figure dropped down to $1.2 billion. With AMC, the value dropped from $1.3 billion to $411 million during the same time frame. These restrictions “limited market access for ordinary retail investors and undermined confidence in market integrity.”
The rise of meme stocks, which the report refers to as the Meme Stock Market Event (MSME), revealed systemic issues in Robinhood’s infrastructure. Furthermore, the MSME raised concerns in the controversial payment for order flow (PFOF) business model. PFOF is when a brokerage routes customer orders to a market maker in exchange for a fee, or rebate.
With that in mind, let’s get into the details of the House report.
10 Things to Know About the Meme Stocks Report
- The report states that Robinhood engaged in “troubling business practices, inadequate risk management, and a culture that prioritized growth above stability.”
- On Jan. 28 of last year, the Depository Trust & Clearing Corporation (DTCC) waived $9.7 billion in collateral requirements for six member firms, including Robinhood.
- Without the waiver, Robinhood would have defaulted on its collateral obligations.
- Meanwhile, Robinhood executives were aware of liquidity issues leading up to the rise of GME and AMC stocks.
- The platform relied on “incomplete statistical models” to calculate collateral obligations leading up into the MSME.
- Ultimately, the MSME proved brokerages and regulators were unprepared for the influx of retail trading.
- Apex Clearing Corporation CEO Bill Capuzzi believes an event like the MSME will happen again “for sure.”
- Retail activity accounted for 20% of stock market activity in the first half of 2021. In 2020, retail activity totaled 10% of market activity.
- Still, Robinhood head of government affairs Lucas Moskowitz said the report reveals “nothing new.”
- The report calls for increased market enforcement, such as tailored stock halts and liquidity stress tests.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
