However, the report leaves the door open for “further consideration” on issues such as “digital engagement practices” that brokerages can use to glorify risky stock trading.

Robinhood (HOOD), for example, has drawn attention to the use of digital confetti to celebrate trades, a practice it has abandoned as some criticize brokerage houses for actively promoting gambling.

The report says these practices can be encouraged by the industrial order flow payment model, where brokerage firms route orders through wholesale market makers. SEC Chairman Gary Gensler did not rule out the possibility of a total ban on the model.

[Read: How do brokerage firms make money]

The SEC also suggested better information on short positions to better monitor unusual price dynamics, as well as shorter settlement cycles that could reduce the likelihood of brokers imposing controversial trading restrictions.

SEC staff stressed that the agency’s job is to ensure fair, orderly and efficient markets – not to eliminate price volatility.

“People may disagree about the outlook for GameStop and other memes stocks, but those disagreements are what should lead to price discovery rather than disruption,” the report read.

Senior SEC officials said the report was not designed to take specific policy action, leaving it unclear whether there are immediate implications for the SEC’s approach to brokerage firms. , the hedge funds, clearing houses, or wholesale market makers that got engulfed in the episode.

The story continues

Flashback to January 2021

Most of the staff report recaps the GameStop stock surge fueled by WallStreetBets in January 2021. Short sellers were forced to hedge their positions as more investors crammed into the meme. Within days, the shares of GameStop, a struggling video game retailer, had exploded by more than 2,000%.

[Read: What is short selling?]

A lot of controversy lies in what happened after the initial pop.

Some brokers have started placing restrictions on the ability to buy – but not sell – memes stocks. The likes of Barstool’s Dave Portnoy began to spark theories about hedge funds and wholesalers pressuring brokerages to stop the rise in memes stocks.

The SEC report suggests otherwise, noting that margin calls and capital charges assessed by clearing houses (which actually settle the trades themselves) have largely forced brokerage firms to restrict trades.

The SEC noted, however, that the clearing requirements were not the source of all the restrictions. For an anonymous brokerage, “capacity issues” in generating unique identifiers for stock orders apparently led it to restrict customers from buying GameStop and the AMC movie chain, another stock of memes, for a short time.

The report also questions the idea that GameStop’s prices were determined by market makers (i.e. Citadel Securities) buying stocks to hedge against the options contracts they themselves have. same subscriptions (called “gamma squeeze”). The SEC has also ruled out the role of “naked” short selling in GameStop’s price dynamics, insisting that GameStop “has not encountered any lingering problems” with clearing trades.

The services report concludes by noting that “broad participation” remains a core feature of securities trading in the modern era, reminding market participants of what is at stake when price volatility arises.

“Underneath the memes are real businesses, with employees, customers and plans to invest in the future,” the report read.

Brian Cheung is a reporter covering Fed, Economics and Banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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