The Securities and Exchange Commission came down yesterday with its long-awaited report on the GameStop trading frenzy this January that saw the company’s stock price spike 1,700% and upended the markets. The report was largely a yawn, concluding that markets functioned largely how they should have, even though it was deeply weird.
The upshot here is that the markets are helpless to a bunch of marauding investors who can pump a stock just because they can, and meme stock frenzies will probably keep happening forever, which is awesome. Coincidentally, the so-called apes of the r/WallStBets crowd — aka, the Redditors who drove the meme stock frenzy in the first place — celebrated their meme appearing across from New York’s famous Charging Bull statue. (It’s actually a statue of Harambe, the gorilla killed in 2016 who subsequently became a meme, as part of a protest against “uncompassionate capitalism,” MarketWatch reports).
But while the SEC’s report largely blesses the structure of the memeified market, there is one particular aspect that’s singled out. That’s “payment for order flow,” or the selling of trades to middlemen — and a key driver of GameStonk frenzy. The idea is that those middlemen then sell big blocks of those stocks at an even better price to a broader market. While that means that companies like GameStop, AMC cinemas, or any of the stocks that’ve spiked for left-field reasons are fine, the broker that helped facilitate a large part of this — mobile brokerage company Robinhood — may have more to worry about.
First, payment for order flow is a terrible term, the kind of garbage market jargon that keeps people from understanding what’s actually happening with their money. Robinhood exploded in popularity because it offered trading with no fee, even though it directed its trades to middlemen who paid for the orders — not those who necessarily had the best price. It’s a lucrative practice. According to Robinhood’s filings, that’s how it makes about 80 cents of every dollar in revenue.
Effectively, payment for order flow is a form of hidden inflation. You want to buy stock? You can do it for “free,” but the price will probably be higher than the best offer out there. It’s a bit like discovering that your favorite bar dropped its cover charge, but the price of all the drinks inside are more expensive. You may feel you’re getting a better deal off the bat, but the odds that your bank account is better off by the time you leave isn’t so high.
And just like a bartender plying you with more drinks, these payments make it in the broker’s interest to get you to trade more. The SEC warns that “payment for order flow and the incentives it creates may cause broker-dealers to find novel ways to increase customer trading, including through the use of digital engagement practices.” For anyone who’s opened Robinhood’s trading app, this is central to the whole experience.
Of course, Robinhood isn’t the only broker out there that sells its trades. But SEC Chair Gary Gensler has made it plain that he doesn’t like it. (Other countries, like Canada and the U.K. have banned the practice outright). The SEC, like other federal regulators, tends to telegraph its intentions ahead of time so as not to catch Wall Street off-guard. For anyone who’s been doubting their intentions to upend this trading practice, consider yourself warned.
Kevin T. Dugan
@kevintdugan
NEWSWORTHY
Apple crunch. Wall Street bank JPMorgan Chase warned that Apple will sell fewer iPhones this year thanks to — you guessed it — the chip shortage. Apple will make about $63 billion in revenue during the first quarter of its fiscal year off the phones, down 4%, according to the report.
Empty wallet. Facebook is launching its digital wallet for cryptocurrencies — without its own digital token. Users piloting the Novi wallet in the U.S. and Guatemala — the only two countries available right now — won’t be able to use Facebook’s own Diem (formerly known as Libra) in the wallets, and instead are relegated to using the Paxos stablecoin, according to The Verge. Coinbase is the custodian for the wallets, and the news sent the trading platform’s stock up about 2%.
Russian fines. Google faces a fine of as much as $240 million, or 20% of its revenue in the country, after ignoring orders to take down information the government there has deemed illegal. Russia has been trying to crack down on dissent in the country and imposing tighter controls over the internet, like nearby China.
Futures bright. An exchange-traded fund of Bitcoin futures rose 2% in its first day of trading today, one of the first, and most anticipated, investment vehicles broadly available to the public for Bitcoin trading. The ProShares Bitcoin Strategy ETF doesn’t have any money in actual Bitcoins, but instead in futures that bet on the direction of assets like the digital currency.
FOOD FOR THOUGHT
This time is different, maybe. Judging by this Wall Street Journal article, Congress will finally do … something … to rein in tech companies. It could be kind of antitrust-y, or it could rewrite Section 230, the liability protection clause of the Communications Decency Act, or it could do something else. Or nothing. The article notes that there’s momentum to act, but until there’s an actual bill making its way to the Senate floor, nothing is certain. There’s a lot in this article about how the time is right, there’s bipartisan support, the tech companies are in a weak position. It’s hard to argue with all that, but this is Congress we’re talking about.
From the article:
Last week leaders of the House Energy and Commerce Committee rolled out a new proposal to update the liability shield known as Section 230 that generally insulates internet platforms from liability for harms caused by users’ posts on their sites.
The legislation would remove the liability shield where a platform uses personalized algorithms to promote harmful content. That is a potentially major change that would discourage targeted promotion of misleading and harmful content, according to sponsors.
IN CASE YOU MISSED IT
World’s 25 Best Workplaces by Fortune Editors
‘Gone too far’: Meet the Dutch chips giant that Silicon Valley loves and Biden fears by Christiaan Hetzner
Alibaba CEO defends company’s $15.5 billion donation to China’s ‘common prosperity’ drive by Nicholas Gordon
What’s causing supply-chain delays? It’s not just port disruptions by Eamon Barrett
Uranium meme-stock traders get help from a whale, triggering a mammoth rally by Sophie Mellor
New Alibaba server chip is a milestone in China’s drive for semiconductor self-sufficiency by Coco Liu, Debby Wu, and Bloomberg
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BEFORE YOU GO
Eye in the sky. Satellite imagery is getting so precise, and abundant, that uncounted emissions of greenhouse gasses is now something that can be caught and measured by laymen. The Washington Post has a pretty cool story focusing on Russia — it’s undercounting the leakage of methane gas by about 10 million tons in 2020, by one count — and leads off with an anecdote about how a reporter was able to pinpoint where a major leak happened with the help of a U.S. satellite. It’s a stark contrast to revised annual emissions reports from Russia that show ever-lower levels of gas leaks.
