SEC Says "Meme-Stock" Surge Earlier This Year Didn't Broadly Affect Hedge Funds

Early this year, the U.S. stock market shook as GameStop prices shot up after the "meme-stock" frenzy, but a new report says the system didn't break.

A report released Monday by Securities and Exchange Commission staff about January's "meme-stock" mania said the trading in GameStop shares and other so-called meme-stocks led to big losses for some hedge funds, but it didn't have the impact sought by amateur investors who wanted to stick it to the hedge funds. Retail investors were also shut out from buying as a new generation of amateur investors used their phones to promote trading on Reddit and Twitter.

One of the main takeaways from the report is that GameStop's stock shot from $39 to $347 in a week, yet the report indicated the market policies and basic systems remained stable.

"The trading in meme stocks during this time highlighted an important feature of United States securities markets in the 21st century: broad participation," the report said.

The report also said that improved reporting of short sales is another area that's worth examining.

For more reporting from the Associated Press, see below.

GameStop
FILE - In this Thursday, Jan. 28, 2021, file photo, a GameStop sign is seen above a store, in Urbandale, Iowa. The U.S. stock market certainly shook when hundreds of thousands of regular people suddenly piled into GameStop earlier in 2021, driving its price to heights that shocked professional investors, but it didn't break. AP Photo/Charlie Neibergall, File

The report also didn't make any recommendations for changes to how the market is structured, but it pointed to several areas for further consideration. They include topics that SEC Chair Gary Gensler has already cited in recent speeches, such as whether the way some brokerages make their money encourages them to push customers to trade more often than they should.

The report also indicated the SEC could further scrutinize events that may cause a brokerage to restrict trading in a stock. During the height of the frenzy, several brokerages barred customers from buying GameStop after the clearinghouse that settles their trades demanded more cash to cover the increased risk created by its highly volatile price. That left many investors incensed.

The report also raised questions about whether investors are getting the best execution on their trades when so many are getting routed to big trading firms instead of to exchanges like the Nasdaq or the New York Stock Exchange.

Hedge funds as a group have been making money this year, including a 1.2% return in January during the throes of the meme mania, according to the HFRI Fund Weighted Composite index.