01.29.2021
By Shanny Basar

US Equity Trading Volume Reaches Record

A record number of US equities were traded on 27 January as retail investors bought shares in retailer GameStop, which had been shorted by some hedge funds.

The volume of shares traded in U.S. equity markets reached an all-time high of 24.48 billion on Wednesday this week according to Cboe Global Markets. The notional value traded was $891bn (€734bn) which is the third highest on record behind 18 December last year and the record of $989bn on 28 February 2020.

On January 27 2021 shares of GameStop hit an intraday high as users of online forum Reddit drove up the price after hedge funds had taken a large short position in the retailer.

The US Securities and Exchange Commission said in a statement today that it is closely monitoring and evaluating the extreme price volatility of certain stocks’ trading prices over the past several days.

The SEC said: “Our core market infrastructure has proven resilient under the weight of this week’s extraordinary trading volumes. Nevertheless, extreme stock price volatility has the potential to expose investors to rapid and severe losses and undermine market confidence.”

It is working closely with other regulators and the stock exchanges to ensure that regulated entities uphold their obligations to protect investors and to identify and pursue potential wrongdoing.

“The Commission will closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities,” added the statement. “In addition, we will act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws.”

Kyle Voigt, analyst at financial services boutique KBW, said in a report that it is unclear what the regulatory response will be and all of the following seem possible – enforcement actions, changes to broker capital requirements, headline risk around payments for order flow, more restrictions around retail options trading, restrictions on free shares and/or other marketing practices.

“However, Voigt also wouldn’t be surprised if the regulatory response to this was something no one is entirely contemplating at the moment,” added the report.

He highlighted there have been media reports that both the Senate Banking Committee and the House Financial Services Committee have said they intend to hold hearings on the events.

The analyst continued that he would not be surprised if the hearings result in some more discussion around payments for order flow, even though he does not believe it played a clear role in the extreme price action or retail brokerages’ response.

“However, Voigt acknowledges that this has always been a hotly debated issue,” said the report. “ PFOF has been often times linked to the ability for brokerages to offer free trading, and some of the more recent growth in retail trading (and the velocity of trading) could be related to these lower frictional costs.”

Business professor Scott Galloway had warned last year that trading app  Robinhood gamifies trading, in contrast to rivals such as Charles Schwab that encourage investing,

Galloway said in a blog: “At Robinhood, users aren’t customers, they’re products. More specifically, their trades are the product, which Robinhood sells to market makers. The more their users trade, the more money Robinhood makes.”

Nicholas Colas, co-founder of DataTrek Research, said in a report that the GameStop affair is a classic story of disruptive innovation which almost never goes back in the bottle once it has begun.

“Free trading apps and social media have empowered a new sort of trader, creating non-linear outcomes,” he added. “There may well be more downdrafts like Wednesday; be ready to buy them.”

He continued that investors should be very wary of shorting any name a retail investor likely knows.

“There’s a certain irony that GameStop, where plenty of the current crop of retail investors likely shopped in their youth, is the eye of the current storm,” added Colas. “If I were running a market neutral book, I would pair longs with industry/sector exchange-traded fund shorts and look for relative outperformance. Single stock shorts can blow out portfolio risk very quickly in the current market.”

In addition, he noted that the important issues to equity values remain – vaccine rollouts, earnings leverage, inflation and interest rates.

Hedge fund manager Chanos said: “The affected hedge funds were run over, but few noticed that other big hedge funds made as much, or more, than the retail investors.

So just what is all the outrage about? The shorts/HF’s lost, retail (and HF’s!) won, and we all learned about the risks of the no cost online brokerage model. But I am hard-pressed to see why making a lot of $ in a heavily-shorted set of stocks is a national crisis.”

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