The U.S. Securities and Commission issued a report earlier this month suggesting brokers — via gamified user interfaces and mechanisms such as payment for order flow — lured investors to increase their trading which, in turn, resulted in higher revenues.

Context: The SEC report comes after a wave of speculative commentaries on online forums like WallStreetBets earlier this year in which market participants fueled a rise in the volume and share prices of popularized meme stocks. The report closely examined trade in GameStop Corporation (GME).

Shares of the stock rose as high as $513 premarket in late January 2021, after which, due to the risk management of clearing agencies, numerous brokers limited trades.  This resulted in synthetic imbalances and a move lower in price.

The Findings: Amid a rebellion against short-selling professional investors — evidenced by a short interest in GameStop, as a percentage of float, as high as 123% — the narrative months ago was that the meme stocks experienced a short squeeze.

That’s opposite to what the SEC’s report suggests: it said that although “the run-up in GME stock price coincided with buying by those with short positions, buying was a small fraction of overall buy volume.”

In the SEC’s analysis of the options market, there was no evidence of a gamma squeeze.

“[T]his increase in options trading volume was mostly driven by an increase in the buying of put, rather than call, options. Further, data show that market-makers were buying, rather than writing, call options.”

The Conclusions: The SEC’s conclusion on the role options played during the near-vertical price rise in stocks like GameStop may be flawed, according to SpotGamma founder Brent Kochuba.

Kochuba said he believes retail investors aggressively bought stock and short-term call options, initiating a gamma squeeze. Thereafter, options volatility and prices rose dramatically, pricing out retail. That’s when institutional investor flow came to dominate.

SpotGamma’s data suggests that a gamma squeeze transpired in two stages:

• The first was the result of significant call buying on the part of retail participants.
• Later, institutional participants sold to open put options.

Both of these actions resulted in a so-called short-gamma environment, leading counterparties to buy stock into the price rise. This exacerbated underlying price movements.