Top financial regulators believe markets 'resilient,' after Yellen meeting

Top financial regulators said Thursday the market is “resilient” — but agreed to study recent volatility and assess whether investors were being adequately protected.

The comments came after a meeting convened by Treasury Secretary Janet Yellen to discuss financial service issues after a mob of online traders drove surges in prices for GameStop, silver, and other stocks and commodities.

“Secretary Yellen believes it is imperative to uphold the integrity of these markets and ensure investor protection,” according to a statement from the Treasury Department.

In an early test as she begins to tackle the economic and pandemic crisis, Yellen had called the meeting with the heads of the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Reserve to discuss the market situation, Treasury officials told NBC News.

In an interview with ABC’s “Good Morning America” on Thursday morning, Yellen said: “We really need to make sure that our financial markets are functioning properly, efficiently, and that investors are protected. We need to understand deeply what happened before we go to action. But certainly we’re looking carefully at these events.”

At the meeting, regulators “discussed market functionality and recent trading practices in equity, commodity and related markets,” the Treasury Department statement said.

“The regulators believe the core infrastructure was resilient during high volatility and heavy trading volume and agree on the importance of the SEC releasing a timely study of the events,” the statement continued. “Further, the SEC and CFTC are reviewing whether trading practices are consistent with investor protection and fair and efficient markets.”

Shares of GameStop, the underdog used video game retailer, soared to over $480 during the past two weeks, before falling to $90. Prices for other so-called “meme stocks” also shot up, including movie chain AMC and former cell phone giant Nokia. Several of the targeted companies had been heavily shorted by hedge funds, who were subsequently forced to buy up shares to cover their positions as the stocks rose, which only drove the prices higher.

While some have cheered the online antics, the episode has exposed several exploitable angles in the financial market that regulators are now being forced to take seriously.

One of the catalysts for the stock movements was users of the commission-free mobile trading app Robinhood. But during the surge in trading volume, the company last week restricted purchases for GameStop and other hot stocks to a single share. That throttling of demand caused outrage from users, and drew scrutiny from regulators. The SEC said it was looking closely at any abusive activity and examining closely any firm that restricted its customers.

Robinhood has also raised eyebrows and questions because of how it makes money. Instead of charging users per transaction, brokers like Robinhood use market makers such as Citadel Securities and Virtu to execute orders in exchange for something called “payment for order flow.” The established practice lets high-speed trading firms pay brokerages in order to execute trades by small-time investors. Critics say it can create potential conflicts of interest, while supporters say it’s necessary to conduct quick trades at good prices for retail investors.

“Citadel Securities has not instructed or otherwise caused any brokerage firm to stop, suspend, or limit trading or otherwise refuse to do business,” a company spokesperson told NBC News in an email. “Citadel Securities remains focused on continuously providing liquidity to our clients across all market conditions.”

The practice of payment for order flow has come under fire in the last week, causing some companies to reassess their revenue streams. Investing app Public.com announced this week it would no longer accept payment for order flow in order to remove “this conflict of interest from our business model.” Instead, it will route all orders directly to stock exchanges and ask customers to attach a “tip” to their trade orders to cover the cost.

Regulators and lawmakers are likely to be looking closely at these issues and more in an attempt to catch up with the new technological advancements. In addition to Sec. Yellen’s meeting, the House Financial Service Committee is holding a hearing on Feb. 18 to address the concerns. Robinhood’s CEO and the online trader who published the play that drove the frenzy have been called to testify.

A spokesperson for Robinhood declined to comment.