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ASA Raises Questions on GameStop Market Frenzy

Urges policymakers to prioritize investor protection and maintain the safety and soundness of U.S. capital markets



WASHINGTON – The American Securities Association (ASA) today submitted testimony for the record on the House Financial Services Committee hearing to examine the GameStop (GME) market frenzy and its impact on retail investors.

“Retirees, pensioners, working families, and mom-and-pop investors were all impacted during the GME market frenzy, and we look forward to working with policymakers to improve investor protection and maintain the safety and soundness of our capital markets,” said ASA CEO Chris Iacovella.

Customer Protection and the Gamification of Trading


In its written testimony, ASA raised customer protection concerns regarding the use of interactive algorithms and the gamification of trading. “In our view, when a registered broker-dealer has a business model that uses an interactive algorithm designed to encourage the execution of customer orders so it can sell those orders to a third party for profit, then policymakers should ask the following questions: (1) is an account under this model really ‘self-directed’; (2) should the solicitation, Regulation Best Interest, churning, and other customer protection rules be applied to the algorithm carrying out the ‘recommendations’ under the model; and (3) is it appropriate for the firm to offer retail customers with little-to-no trading experience the ability to leverage their accounts by trading on margin.”

Short Selling: Examine the Plumbing and Add Transparency


The ASA asked “whether there is any social good in allowing the short interest of a company’s stock to exceed 100% of its shares outstanding, and if the answer is no, then we recommend that Congress and/or the SEC should thoroughly examine the details of the Reg SHO delivery rules and the mechanics and pricing of stock lending arrangements,” Iacovella wrote. “A thorough examination should (1) determine whether ‘naked’ short selling is still occurring in the market, (2) review the delivery exemption for market makers, which effectively allows them to fail indefinitely, (3) examine whether Reg SHO, which requires those who are short to buy back the stock at any price, contributed to and exacerbated market volatility, and (4) explore whether the re-hypothecation of shares through stock lending arrangements (hard-to-locate or not) and the costs associated with such arrangements should be transparently disclosed to all market participants.”

Additionally, ASA outlined three recommendations to increase short sale transparency and help to level the information playing field for all investors.

Broker-Dealers Must Be Properly Capitalized


ASA also called for broker-dealers to be properly capitalized to protect the broader financial system. “As the GME short squeeze unfolded, the clearinghouse recognized that an inadequately capitalized broker-dealer could pose a risk to our markets and it took the action necessary to protect the system,” Iacovella wrote. “Attempts to blame the clearinghouse or the timing of the settlement cycle for what happened during the short squeeze are a smokescreen.”

“America’s capital markets can play a vital role in closing the wealth gap in this country, which is why we must work together to maintain the public’s trust and confidence in them. The ASA looks forward to being a resource as you work through these important issues,” Iacovella concluded.




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ASA’s regional financial services companies work in communities across the country to create jobs, grow the economy, and increase prosperity for all Americans. The ASA exclusively represents the capital market and private client interests of its members and seeks to promote free market principles making it easier to access financial advice and capital. ASA members help Americans save for retirement, provide Main Street businesses with capital to grow, and advise hardworking Americans how to create and preserve wealth. For the latest updates follow @AmerSecurities and learn more at http://americansecurities.org/.

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