Treasury Secretary Janet Yellen called a meeting with the country’s top regulators on Thursday, who continue to analyze whether the recent volatility in popular meme stocks and the responses of brokers to it “are consistent with investor protection and fair and efficient markets, ”according to a statement by the Treasury Department.
Yellen met with the heads of the Securities and Exchange Commission, Federal Reserve Board, Federal Reserve Bank of New York and Commodity Futures Trading Commission to discuss the functioning of financial markets and the practices of investors and brokers in recent weeks.
“Regulators believe that the core infrastructure was resilient during high volatility and high volume of trading, and agree with the importance of the SEC issuing a timely study of events,” according to the statement. “Secretary Yellen believes that it is imperative to maintain the integrity of these markets and ensure investor protection.”
The meeting comes after a months-long social media campaign by retail investors to raise the value of heavily sold shares like GameStop Inc. GME,
and AMC Entertainment Holdings Inc. AMC,
and the recent decision by commission-free online brokers, like Robinhood, to restrict the purchase of shares and options at these companies.
Read More: Lawsuits see conspiracy in Robinhood’s GameStop movements, but experts doubt the narrative
Regulators appear to be approaching the case from several angles, including applying scrutiny to the decisions of Robinhood and other brokers to restrict trading, as well as the potential for coordinated market manipulation by evangelists on social media.
One approach that the SEC and the Financial Industry Regulatory Authority can take would be to reduce the practice of payment by order flow, where stock brokers are paid to direct client orders to market makers, creating possible conflicts of interest.
Regulators are also likely to be interested in how the dynamics of free online margin trading, coupled with a social media ecosystem that has fueled violent swings in individual bond prices, may be interfering with price discovery in financial markets.
“Perhaps a concern among major regulators is that stock markets are not finding prices effectively and that individuals are trading on credit in those markets,” said Patrick Corrigan, a professor at Notre Dame Law School specializing in securities regulation securities. .
“Regulators will look at whether margin trading, short selling, ‘game-like’ features of certain brokerage applications, coordinated manipulation or other factors may be interfering with the price discovery process in the stock markets,” he added.
Some analysts warn that, despite the Robinhood-GameStop saga affecting Washington in recent days, the most likely scenario is that regulators will make minor reforms, while significant legislation is not passed.
“We expect the agency to explore and eventually approve stricter requirements on brokerage disclosures to clients, including making it clear that companies can stop stock trading,” wrote Ian Katz of Capital Alpha Partners in a note to clients earlier this week. week.
“Congress will talk a lot about the commercial frenzy, giving hedge funds a verbal beating,” he added. “Lawmakers will come up with bills, but we don’t believe anything significant becomes law – unless the extreme volatility intensifies and extends to more actions.”