In January 2021, shares of GameStop went from a price of $18 per share to a high of $480 per share due to both market factors and its popularity as a “meme stock”. The stock’s popularity caused some broker-dealers to restrict trading on January 28. On October 18, 2021, the SEC released a report with their analysis of what happened and why.
The report concludes the explosion of the stock was due to 5 factors:
- Large price moves: The price of the GameStop stock saw a 1,600% increase during the month of January 2021.
- Large volume changes: In the month of January 2021, the number of individual accounts went from under 10,000 to almost 900,000.
- Large short interest: In January 2021, GameStop short interest reached 122.97%, which was far higher than other popular meme stocks.
- Frequent Reddit mentions: During this surge, the popular subreddit WallStreetBets, along with other social channels, expressed substantial interest in the GameStop stock.
- Significant coverage in mainstream media: The social media frenzy flooded into mainstream media as some argued the GameStop stock was undervalued and should be seen as an attractive investment.
At the end of the SEC’s report, four areas of possible improvement were identified: forces that may cause a brokerage to restrict trading, digital engagement practices and payment for order flow, trading in dark pools and through wholesales, and short selling and market dynamics.
While many market experts expected the 45-page report to claim the price spike was due to a “short squeeze”, it pointed more towards the social media attention as the main cause. The report also did not suggest any changes to the market structure or trading process, leaving investors wanting more answers.