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Staff Report on Equity and Options Market Structure Conditions in Early 2021
October 14, 2021
DISCLAIMER: This is a report of the Staff of the U.S. Securities and Exchange Commission. Staff reports, Investor Bulletins, and other staff documents (including those cited herein) represent the views of Commission staff and are not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved the content of these documents and, like all staff statements, they have no legal force or effect, do not alter or amend applicable law, and create no new or additional obligations for any person. The Commission has expressed no view regarding the analysis, findings, or conclusions contained herein.
Table of Contents
- Introduction
- U.S. Market Structure and Securities Regulatory Framework...................................................
- 2.1 Equities and Options Market Structure
- 2.2 Overview of the Regulatory Framework.......................................................................
- 2.3 Individual Investors and Retail Broker-Dealers
- 2.4 Order Execution and Segmentation of Individual Investor Flow ......................................
- 2.5 Clearance and Settlement.........................................................................................
- GameStop: What Happened ...............................................................................................
- 3.1 The Run-Up to January 2021 and Increasing Individual Investor Participation ...................
- 3.2 GME Equities Trading...............................................................................................
- 3.3 Impact on Exchange-Traded Funds .............................................................................
- 3.4 Short Selling and Covering Short Positions...................................................................
- 3.5 Clearing Agency Margin and Capital Issues ..................................................................
- 3.6 Broker-Dealer Reactions and Trading Restrictions ........................................................
- 3.7 Role of Off-Exchange Market Makers .........................................................................
- 3.8 Available Liquidity for GME .......................................................................................
- 3.9 GME Options Trading ...............................................................................................
- Conclusions ......................................................................................................................
linked trading activity to the presence of short interest, characterizing trading in GameStop as an act of rebellion intended to humble short-selling professional investors who had allegedly targeted the stock. Lastly, the episode highlighted the risks that exist while trades are settled and raised concerns about the mechanisms market participants use to manage those risks. Specifically, volatility combined with settlement risks led some firms to temporarily restrict
trading. We discuss aspects of equity and options market structure below.
2. U.S. Market Structure and Securities Regulatory Framework
2.1 Equities and Options Market Structure
To understand what transpired in January 2021, it is necessary to understand the market
structure within which the events occurred.^2 From the perspective of individual investors, the lifecycle of a stock trade starts with an investor placing an order through an account they establish with a broker-dealer.^3 The broker-dealer then routes the order for execution to a trading center, such as a national securities exchange, an alternative trading system (“ATS”), or an off-exchange market maker.^4 Once a trading center executes the order, the customer receives
(^2) See, e.g., “Staff Report on Algorithmic Trading in U.S. Capital Markets,” SEC Staff
report (August 5, 2020), Sections II and X, available at: https://www.sec.gov/files/Algo_Trading_Report_2020.pdf.
(^3) Trading venues can have a wide variety of order types, but there are fundamentally two
types: limit orders and market orders. Limit orders specify a price and will stay on an order book until an opposite order comes in that meets or beats that price. Alternatively, market orders are intended to be executed as soon as possible at the best available price.
(^4) Both ATSs and off-exchange market makers are also broker-dealers registered with the
Commission under the Securities Exchange Act of 1934 (“Exchange Act”). Additionally, the first trading center a broker-dealer routes an order to may not execute the order and instead the order may get routed to one or more other trading centers.
a confirmation and the trade is reported to a securities information processor that collects, consolidates, and publishes the price and volume data to market data vendors and others. This processor will publicize the trade details (i.e., that the buyer and seller both report the same security, price, shares, and dollar amount). The trade details are also sent to the clearing broker, who affirms the trade by verifying the trade details. The clearing broker must “settle” an equity
trade within two days of the trade date (called “T+2”) by officially moving the stock from the seller’s brokerage firm’s account to the buyer’s brokerage firm’s account and moving the money from the buyer’s brokerage firm to the seller’s brokerage firm, a process facilitated by clearing agencies registered with the Commission under the Exchange Act.
Options market structure is broadly similar to equities market structure with several key differences. Specifically, “standardized listed options” are traded only on a national securities exchange, there are a vastly larger number of securities listed and traded, displayed liquidity is primarily derived from market maker quotes, and options settle on the next business day following the trade (T+1). With respect to the number of series of options for each underlying security, there are more than 10,000 listed stocks in the National Market System (“NMS stocks”)
and more than 1,000,000 options series.^5 Because of the large number of series, there are less likely to be investor limit orders resting on an exchange’s order book in any one series at any given time, so prices are commonly set by registered market makers’ quotes.
2.2 Overview of the Regulatory Framework
The Commission’s mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. In carrying out its mission, the Commission oversees self-regulatory organizations (“SROs”) such as the national securities exchanges, the clearing
agencies, and the national securities associations (namely, the Financial Industry Regulatory Authority, or “FINRA”), all of whom act as regulators of their broker-dealer members.^6 The
(^5) Options are listed according to a “class,” which represents the underlying security (e.g.,
ABC stock). Within each class, options are listed in series, which denote the options type (“call” or “put”), the strike price, and expiration date. For example, “ABC June $ calls” refers to a call option on ABC with a strike price of $50 (giving the buyer the right, but not the obligation, to buy 100 shares of ABC stock at $50 on the expiration date in June regardless of the then-current price of ABC stock). Options are priced differently than stocks, as they are expressed as the premium on a per share basis, such that an option with a quote of $2 where one options contract represents 100 shares of underlying stock would cost $200 in premium.
(^6) Among other things, the Commission also helps investors gain access to materially
complete and accurate information about companies and the securities they offer and sell; oversees investment companies and investment advisers; and investigates and brings civil charges in federal district court or in administrative proceedings based on violations of the federal securities laws.
2.3 Individual Investors and Retail Broker-Dealers
Individual investors access the markets through accounts at broker-dealers.^10 Broker- dealer customers can open “cash” accounts or “margin” accounts. With a cash account, the customer must pay the full amount for securities purchased. With a margin account, the broker-
dealer loans the investor money with the securities in the investor’s account serving as collateral. Individual investors in a margin account can use this money to purchase securities, sell securities short, or cover transactions in case their available cash falls below zero (i.e., overdraft).^11
In order for a customer to trade options,^12 broker-dealers must conduct due diligence that options trading is appropriate for the individual customer. They often do this by requiring customers to obtain specific approval to open an options account, generally through completing an application that asks questions about the customer’s investing experience, financial situation, and risk tolerance.^13 Depending on the customer’s responses, the broker-dealer may limit the customer to lower levels of options trading representing lower degrees of risk.^14
Retail broker-dealers have attracted customers by reducing commissions and offering more tools, features, functionality, and convenience to transact. Some use promotional or award programs to attract and retain customers, like offering a free share of stock upon account opening, offering tiered credits for certain levels of deposits or for transferring an account from
(^10) See, e.g., “Investor Bulletin: How to Open a Brokerage Account,” SEC Office of Investor
Education and Advocacy (June 10, 2021), available at https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts- bulletins/investor-bulletins-43.
(^11) See, e.g., “Investor Bulletin: Understanding Margin Accounts, SEC Office of Investor
Education and Advocacy” (June 10, 2021), available at https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts- bulletins/investor-bulletins-29.
(^12) See, e.g., “Investor Bulletin: Leveraged Investing Strategies – Know the Risks Before
Using These Advanced Investment Tools,” SEC Office of Investor Education and Advocacy (June 10, 2021), available at https://www.investor.gov/introduction- investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-2. See also Regulatory Notice 21-15, “FINRA Reminds Members About Options Account Approval, Supervision and Margin Requirements” (April 2021).
(^13) Pursuant to rules of FINRA, a registered national securities association, broker-dealers
are required to make such approvals of any customer seeking to trade in options, prior to accepting an order from that customer to do so. See FINRA Rule 2360(b)(16) (Options). See also FINRA Regulatory Notice 21-15, “FINRA Reminds Members About Options Account Approval, Supervision and Margin Requirements” (April 2021).
(^14) “Investor Bulletin: Opening an Options Account,” SEC Office of Investor Education and
Advocacy (March 18, 2015), available at https://www.investor.gov/introduction- investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-77.
another broker-dealer, referral programs, or promotions involving celebrities and online influencers. Some retail broker-dealers have focused on designing simple trading apps that make it easier to trade from anywhere. Some have “social” features that allow customers to discuss stocks and trades and display their trades and portfolios to others. A number of features, which broadly include behavioral prompts, differential marketing, game-like features, and other design elements or features, appear designed to engage individual investors. These features, which have the potential to leverage large amounts of user data, raise questions about their effect on investor behavior that the Commission explored in a recent request for public comment.^15
Some brokers have sought to attract new customers by offering the ability to purchase fractional shares.^16 Fractional shares give investors the ability to purchase less than 1 share of a stock.^17 Fractional share programs are specific to each broker-dealer, as stocks do not trade on exchanges in units less than 1 share, and trades may only be reported to a trade reporting facility in multiples of one share.^18
Many brokers have eliminated trading commissions and lowered or eliminated account minimums. While not the first broker-dealer to offer zero commissions, Robinhood Financial, LLC (“Robinhood”) attracted considerable attention when it launched its app, allowing users to
(^15) See Securities Exchange Act Release No. 92766 (August 27, 2021), 86 FR 49067
(September 1, 2021) (File No. S7-10-21) (Request for Information and Comments on Broker-Dealer and Investment Adviser Digital Engagement Practices, Related Tools and Methods, and Regulatory Considerations and Potential Approaches; Information and Comments on Investment Adviser Use of Technology to Develop and Provide Investment Advice).
(^16) A number of prominent stocks have share prices that have appreciated to several hundred
or even several thousands of dollars per share. When that happens, investors with modest account balances can afford to purchase fewer shares than if the stock was priced below, say, $50 per share. For example, an investor that has $500 to invest could purchase 10 shares at $50 per share, but cannot afford even a single share priced at $1,500.
(^17) Broker-dealer fractional share programs typically involve the broker-dealer maintaining a
separate account in which it either aggregates customers together to form a full share (e.g., one customer buys .25 and another buys .75), or uses its own capital to purchase/sell a full share and give its customer the fraction (e.g., one customer buys. and the firm puts the remaining .75 into the special account to satisfy future customer fractional orders). Customers generally cannot transfer these factional shares to another broker-dealer. These programs vary by broker-dealer, and voting or proxy rights depend on the broker-dealer’s policies. See “Investor Bulletin: Fractional Share Investing – Buying a Slice Instead of the Whole Share,” SEC Office of Investor Education and Advocacy (November 9, 2020), available at: https://www.sec.gov/oiea/investor-alerts- and-bulletins/fractional-share-investing-buying-slice-instead-whole-share.
(^18) See “Trade Reporting Frequently Asked Questions #101.14,” FINRA, available at
https://www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq.
Though retail broker-dealers have reduced commissions, some have maintained or increased other sources of revenue, such as: (1) payment for order flow; (2) advisory services or managed accounts from broker-dealers that are dually registered as investment advisers or from affiliated investment advisers; (3) interest earned on margin loans and cash deposits; (4) income generated from securities lending; and (5) fees from additional services. Recent Commission enforcement actions have highlighted some of the conflicts faced by broker-dealers.^28
Some broker-dealers report that younger investors and smaller accounts have been notable sources of new account openings. For example, Charles Schwab indicated that individual investor customers age 40 and below, with account balances below $100,000, are driving a greater percentage of trading volume than in prior periods.^29 Robinhood reported that its average customer is 31 years old and has a median account balance of $240.^30 Apex Clearing
https://clearingcustody.fidelity.com/app/literature/press-release/9896568/fidelity- becomes-the-only-firm-that-offers-zero-commission-online-trading-automatic-default-to- higher-yielding-cash-opt.html#:~:text=Insights- ,Fidelity%20Becomes%20the%20Only%20Firm%20that%20Offers%20Zero%20Commi ssion%20Online,to%20Investors%20of%20all%20Types.
(^28) See, e.g., In the Matter of Robinhood Financial, LLC, “Order Instituting Administrative
and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 15(b) of the Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order,” Securities Exchange Act Release No. 90694 (December 17, 2020) (“Robinhood Order”) (settled order), available at: https://www.sec.gov/litigation/admin/2020/33-10906.pdf (discussing the trade-off between payment for order flow and price improvement and how Robinhood took approximately a 20/80 split of the value between price improvement and payment for order flow, which was a substantially higher percentage to Robinhood than the typical 80/20 rate the principal trading firms paid to other retail broker-dealers); and In the Matter of Cantella & Co., Inc., “Order Instituting Administrative and Cease-and-Desist Proceedings, Pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order,” Securities Exchange Act Release No. 92809 (August 30, 2021) (settled order), available at: https://www.sec.gov/litigation/admin/2021/34-92809.pdf (discussing revenue sharing payments in connection with cash sweep products).
(^29) See, e.g., Past CFO Commentary, Charles Schwab & Co. (March 12, 2021), available at:
https://www.aboutschwab.com/cfo-commentary/mar-2021.
(^30) See, e.g., “ Young, confident, digitally connected - meet America's new day traders ,”
Reuters (February 2, 2021), available at: https://www.reuters.com/article/us-retail- trading-investors-age/young-confident-digitally-connected-meet-americas-new-day- traders-idUSKBN2A21GW; and Testimony of Vladimir Tenev, Co-Founder and CEO of Robinhood Markets, Inc., at Sec. IV, Hearing Before the U.S. House Committee on Financial Services (February 18, 2021), available at:
Corporation, a broker-dealer that provides services to other broker-dealers, has indicated that the approximately 6 million accounts it opened in 2020 represent a 137% increase from the year before, with about 1 million of those accounts belonging to investors with an average age of
19.^31
2.4 Order Execution and Segmentation of Individual Investor Flow
A myriad of market participants and trading venues facilitate the execution of equity and options orders. While customers set the terms of their orders, the retail broker-dealer generally
controls where to route the order for execution, subject to a duty of “best execution,” discussed above.^32
For stocks, trades execute either “on exchange” (i.e., on one or more of 16 registered national securities exchanges that list and/or trade stocks, sometimes called “lit” exchanges) or “off exchange” (e.g., on one or more of 34 ATSs that trade NMS stocks or by off-exchange market makers).^33 Exchanges play a central role in price discovery, as the exchange quotes
(composed of interest from registered market makers and displayed orders from non-market
https://financialservices.house.gov/uploadedfiles/hhrg-117-ba00-wstate-tenevv- 20210218.pdf.
(^31) See, e.g., “Young, confident, digitally connected - meet America's new day traders,”
Reuters (February 2, 2021), available at: https://www.reuters.com/article/us-retail- trading-investors-age/young-confident-digitally-connected-meet-americas-new-day- traders-idUSKBN2A21GW_._
(^32) Customers can use “marketable” orders (i.e., an unpriced “market” order seeking an
immediate execution at prevailing prices, or a “limit” order with a specified limit price that allows an immediate execution at prevailing prices) or “non-marketable” orders (i.e., an order whose limit price does not allow it to execute immediately but rather must wait until a contra-side order comes to trade with it).
(^33) National securities exchanges must register with the Commission under the Exchange
Act, but off-exchange market makers currently are not subject to specific registration requirements (though they must be registered as broker-dealers). While staff does not know the precise number of broker-dealers that hold themselves out as off-exchange market makers, staff understands from regulatory reports that the segment is highly concentrated with a few particularly dominant firms. See, e.g., infra note 41 (discussing Rule 606 reports).
Off-exchange market makers use segmentation to mitigate one of the key risks traders face—prices moving against their positions after executing a trade. Some in the marketplace may possess superior information about underlying asset values and will only buy when posted prices are low relative to their information, and sell when they are high. Other participants may, by virtue of greater quantities of data, have statistically greater predictive ability regarding the
direction of prices. Because market makers are more likely to lose money when interacting with such order flow, they have an incentive to distinguish order flow that does not correlate with future price movements from order flow that does. The bid-ask spread, the difference between what a buyer is willing to pay and a seller willing to accept, normally compensates market
makers for the risk that prices may move against them.^38 To the extent that market makers can segment order flow that is less correlated with future prices, they can offer a lower spread when trading with this order flow. Besides differing in the motive for trading, such orders are more likely to be small, uncorrelated with one another, and thus “one and done” (i.e., not the first in a series of orders intended to transact a large amount of stock), which also allows for a tighter spread.^39
Off-exchange market makers typically offer payment to the retail broker-dealer for the right to trade with its customer order flow (i.e., payment for order flow).^40 These payments can create a conflict of interest for the retail broker-dealer. In contrast to fees and rebates charged or paid by exchanges (discussed below), off-exchange payments are individually negotiated prior to
(^38) See, e.g., Glosten, Lawrence R. and Paul R. Milgrom (1985), “Bid, Ask, and Transaction
Prices in a Specialist Market with Heterogeneously Informed Traders,” Journal of Financial Economics , 14(1), 71-100.
(^39) When evaluating price improvement, it is important to note that the NBBO displayed
across exchanges does not include many of the best prices available on exchanges, such as odd lots and non-displayed orders. A significant amount of activity transacts at prices within the NBBO (even on exchanges). See Securities Exchange Act Release No. 90610 (December 9, 2020), 86 FR 18596 (April 9, 2021) (File No. S7-03-20) (adopting rule changes concerning a new round lot definition and including odd-lot quotations in core data, which, when implemented, will allow individual investors to see, and more readily access, better-priced quotations). While stocks can execute in a variety of ways, Rule 611 of Regulation NMS generally prevents stocks from executing at prices worse than the NBBO. Additionally, in order to avoid the risks of adverse selection, the smart order routers of executing brokers often break up a large order (often referred to as the parent order) into a number of smaller orders (often referred to as the child orders). A small order may thus be followed by a small order in the same direction, a situation which a market maker would like to avoid. Handling large volumes of orders also provides off- exchange market makers with enormous quantities of data that can be used to design and improve trading and risk management strategies.
(^40) Payment for order flow is prevalent in the options market, potentially more so than in the
equities market, but order flow that is purchased by consolidators is executed on exchange. See supra notes 36 - 37 and accompanying text.
trading between the retail broker-dealer and the off-exchange market maker,^41 and the rates and amounts can vary substantially depending on the broker-dealer and its customer order flow. Off- exchange market makers may give the retail broker the choice of how to allocate those funds— either by applying some or all of that payment to improve the prices of its customers’ orders or by allowing the retail broker-dealer to keep part of the payment for itself.^42
Most exchanges offer a form of payment for order flow wherein they compensate firms that provide liquidity with rebates and charge firms that take liquidity.^43 For stocks, some exchanges have retail liquidity programs that allow special order types to interact only with
designated “retail” orders, which may be supplemented by pricing incentives. For options, these come in the form of “marketing fees”^44 as well as transaction rebates. In contrast to wholesalers (as well as ATSs), pricing incentives offered by equity and options exchanges are considered to be rules of the exchange, so these pricing incentives are subject to the filing requirements of the Exchange Act and must be publicly posted.
While stocks can execute in a variety of ways, Rule 611 of Regulation NMS generally
prevents stocks from executing at prices worse than the NBBO. The Commission recently adopted rules that will materially improve the NBBO once those changes are fully implemented, including reducing the size of rounds lots for higher-priced shares and including some odd-lot
(^41) Rule 606(a) under the Exchange Act requires broker-dealers to make publicly available
on a quarterly basis certain aggregated order routing disclosures for held orders that provide, among other things, detailed disclosure of payments received from or paid to certain trading centers and also requires a discussion of the material aspects of broker- dealers’ relationships with those trading centers, including a description of any arrangements for payment for order flow and any profit-sharing relationships and a description of any terms of such arrangements, written or oral, that may influence broker- dealers’ order routing decisions. See 17 CFR 242.606.
(^42) See, e.g., Robinhood Order, supra note 28 (discussing the trade-off between payment for
order flow and price improvement and how Robinhood took approximately a 20/80 split of the value between price improvement and payment for order flow, which was a substantially higher percentage to Robinhood than the typical 80/20 rate the principal trading firms paid to other retail broker-dealers).
(^43) These exchanges are known as “maker/taker” venues, wherein limit orders are paid a
rebate by the exchange while market orders pay the access fee to the exchange. Alternatively, “taker/maker” venues give a rebate to market orders and charge limit orders the access fee.
(^44) Generally speaking, marketing fees are collected by options exchanges from market
makers when they trade with “customer” orders, pooled, and paid out by specified market makers to order flow providers to encourage them to send order flow to the exchange.
clearing agency for the U.S. equities markets, NSCC, a subsidiary of the Depository Trust and Clearing Corporation (“DTCC”), maintains a “Clearing Fund” into which its member broker- dealers contribute margin to protect NSCC from potential losses arising from a defaulted member’s portfolio until it is able to close out that member’s positions. The Clearing Fund consists of required deposits posted by members in the form of cash and eligible securities.
Typically, the largest portion of a member’s Clearing Fund requirement is the volatility component, which estimates the future risk of the cleared portfolio over a given time horizon at a 99 th^ percentile level of confidence. To determine the volatility component for most securities, NSCC uses a parametric Value at Risk model based on historical price movements. While
margin requirements typically change in response to broad-based market movement, the NSCC’s margin framework also allows for both intraday mark-to-market calls and additional special charges from clearing members if NSCC observes unusual volatility in specific securities that it believes would present heightened risk to the clearing agency and its members. Pursuant to its existing rules, NSCC can also impose excess capital premium (“ECP”) charges for members who present a degree of margin exposure for their cleared positions that exceed those members’ excess net capital. ECP charges are “designed to address significant, temporary increases in a
Member’s Required Deposit based upon any one day of activity.”^50 To help members understand their potential required Clearing Fund deposit, NSCC provides certain calculators and information that allow members to monitor their risk and estimate their potential Clearing Fund requirements for actual or hypothetical portfolios.
Similarly, OCC is the clearing agency for listed options for its 16 participant options exchanges. OCC clears and settles listed options trades executed by its clearing members on a proprietary basis as well as for clients. In addition, OCC serves other financial markets, including the commodity futures, commodity options, security futures, securities lending, and the over-the-counter options markets.
3. GameStop: What Happened
3.1 The Run-Up to January 2021 and Increasing Individual Investor Participation
The underlying causes of the meme stock phenomenon that are unrelated to market structure are a subject of speculation that is beyond the scope of this report. Regardless of the causes, many individual investors traded in the meme stocks, which may reflect increases in
(^50) See Securities Exchange Act Release No. 79598 (December 19, 2016), 81 FR 94462
(December 23, 2016) (SR-NSCC-2016-005) (Order Granting Approval of Proposed Rule Change to Accelerate its Trade Guaranty, Add New Clearing Fund Components, Enhance its Intraday Risk Management, Provide for Loss Allocation of “Off-the-Market Transactions,” and Make Other Changes).
investor participation in 2020 in both the equities^51 and options markets.^52 By early 2021, increasing numbers of individual investors were downloading apps for broker-dealers.^53
Against that backdrop, in January 2021, more than 100 stocks experienced large price moves or increased trading volume that significantly exceeded broader market movements. For
some of these stocks, the amount of “short interest,” measured as the number of shares sold short
(^51) For example, off-exchange equities activity, a partial proxy for retail activity because
retail orders are typically routed to off-exchange market makers and executed off exchange, continued to grow throughout 2020 with the 60-day moving average rising from 38.4% on March 23 to 46.5% at the end of the 2020 and the single day percentage exceeding 50% for the first time on December 23, 2020 at 50.4%. Source: Cboe Exchange, Inc. at https://www.cboe.com/us/equities/market_share/ and SEC Division of Trading and Markets (“TM”) staff calculations. In December 2020, over the counter non-exchange listed equity volume (including “penny” stocks) surged, with a daily average of nearly 50 billion shares, compared to roughly 14.7 billion shares per day in November 2020, which had been the most active month over the prior two years. Source: FINRA at https://otce.finra.org/otce/marketStatistics.
(^52) By the end of the first quarter of 2020, standardized listed options trading had grown to
over 30 million contracts a day on average, more than 50% higher than the 19.6 million contracts per day traded in December 2019. Source: The Options Clearing Corporation for options data at https://www.theocc.com/Market-Data/Market-Data-Reports/Volume- and-Open-Interest/Historical-Volume-Statistics and TM staff calculations. Further, the percentage of options volume stemming from small trades of just one contract on 50 of the most-traded stocks had risen to 14% from 10% at the end of 2019 and retail broker- dealers reported large or record levels of options trades. See, e.g., “Free Trades, Jackpot Dreams Lure Small Investors to Options,” Wall Street Journal (June 24, 2020), available at: https://www.wsj.com/articles/free-trades-jackpot-dreams-lure-small-investors-to- options-11592991000?shareToken=st8d4344fa898440e284dd8beb6951960d. Further, the average size of electronic auctions fell by mid-2020 to six contracts per auction from around nine contracts, while the number of auctions per day grew by about 134%. See, e.g., “Q2 2020 Options Review: Record Volumes Continue,” NYSE (July 14, 2020), available at https://www.nyse.com/data-insights/q2-2020-options-review. Through the remainder of 2020, options volume remained high and ended the year at with an average of 34.3 million contracts trading per day in December 2020, the most active month of 2020, compared to a daily average of 24.5 million contracts in January 2020. Source: The Options Clearing Corporation at https://www.theocc.com/Market-Data/Market-Data- Reports/Volume-and-Open-Interest/Historical-Volume-Statistics.
(^53) In January, reports mentioned a notable increase in broker-dealer app downloads,
including Robinhood (more than 3 million) and Webull (more than 800,000). See , e.g., “Robinhood Appears to be Benefiting from the Trading Controversy, Seeing Record App Downloads,” CNBC (February 1, 2021), available at: https://www.cnbc.com/2021/02/01/robinhood-appears-to-be-benefitting-from-the- trading-controversy-seeing-record-app-downloads.html.
Figure 1
GameStop had already started to receive attention on Reddit in 2019, including in discussions about short squeezes. That attention grew throughout 2020. For instance, GME’s short interest ratio of 84% was reportedly noted on Reddit in April 2020.^57
Price increases, trading interest, and social media interest all accelerated in 2021 (Figures 2 and 3). Media attention on GME increased with the January 11 announcement that Mr. Cohen, of Chewy, would join the GameStop board of directors.^58 That day, GME reached an intra-day
high of $20.65, approximately 17% above its prior day closing price. GME’s price and volume began to increase noticeably on January 13, when the closing price rose to $31.40 from $19. the prior day, and the share volume rose to approximately 144 million shares, compared with approximately 7 million shares the day before. On January 22, 2021, the price of GME rose from $43 to $72 (a 71% increase) in approximately three hours. By January 27, GME closed at a high of $347.51 per share, representing a more than 1,600% increase from its closing price on January 11. The following day, share prices jumped further to an intraday high of $483.00. As
the price increased, so too did the trading volume. From January 13-29, an average of approximately 100 million GME shares traded per day, an increase of over 1,400% from the
(^57) See, e.g., “How WallStreetBets Pushed GameStop Shares to the Moon,” Bloomberg
(January 25, 2021), available at https://www.bloomberg.com/news/articles/2021-01- 25/how-wallstreetbets-pushed-gamestop-shares-to-the-moon.
(^58) See , e.g., “GameStop Soars With Activist Ryan Cohen Gaining Board Seats,” Bloomberg
(January 11, 2021), available at https://www.bloomberg.com/news/articles/2021-01- 11/gamestop-soars-with-activist-ryan-cohen-gaining-board-seats.
2020 average. On January 22, 2021, the day of GME’s highest share volume in the month, 197. million GME shares traded.
Overall, GME’s intraday share price increased approximately 2,700% from its intraday low on January 8 to its intraday high on January 28, followed by a decrease of over 86% from
that day to the closing price at the end of the first week of February. The daily closing price changes at the end of January were also highly volatile in dollar terms, ranging from a rise of $199.53 (between January 26 and 27) to a fall of $153.91 (between January 27 and January 28).
Figure 2
