From the: Winter 2021/2022 Newsletter

Numerous small trades in GameStop and a number of other stocks sparked stock market volatility earlier this year. Reddit and other social media platforms promoted these trades. Most of the trading was done on trading platforms of broker-dealers that offer free trades. These broker-dealers are paid for the order flow they send to firms that fulfill the orders. Without the order flow payments, these broker-dealers would be unable to offer free trades.

The broker-dealers on whose trading platforms the trades were made had to restrict trading in the stocks until they raised the additional capital required by their clearinghouses. This caused traders to complain to DFI’s Securities Division, as well as to various other authorities. Many of those complaining were relatively new to trading. Their complaints focused on limitations on stock purchases imposed by their broker-dealers. However, the inquiries about what happened and how it happened extend far beyond the broker-dealers and their trading platforms. Who were those touting trading in GameStop and the other stocks? Did they have any conflicts of interest that might have led them to encourage others to buy the stock?

Congress has conducted hearings on the market volatility. Various securities regulators are investigating aspects of this trading event. There has also been renewed discussion of the practice of payment for order flow as well discussion about the gamification of trading on some of the newer trading platforms. Whether or not Congress takes any action as a result of its hearings, regulatory agencies such as the United States Securities and Exchange Commission and FINRA (the self-regulatory agency for the securities brokerage industry) may well take action in response to recent market volatility.