Does Free Trading in GameStop Mean ‘Game On’?

The GameStop slogan is “Power to the Players”. And may the power be with you.

This past week brought the Reddit and WSB retail investors to a new level of focus.

Not only was GME on the lips of everyone from our friend the massage therapist to every anchor that interviewed anyone they could get on the air to discuss, including me, but it was also the subject of investigation.

Janet Yellen (Treasury Secretary) and Senator Elizabeth Warren are looking into the ramifications of selling order flow. The practice of selling order flow, in which high-speed trading firms pay brokerages for the right to execute orders submitted by individual investors, has long been controversial. Payment for order flow helped set the stage for the manic trading in GameStop. Yet payment for order flow makes zero-commission trading possible by firms like Robinhood.

“In December, Robinhood agreed to pay $65 million to settle SEC allegations that it misled customers about its reliance on payment for order flow and touted its execution quality while filling orders at inferior prices.” WSJ

The upcoming investigation will also look into the practice of short-selling (a longtime practice of selling a stock the funds do not own on the bet that the price will drop). They are also looking into brokerage firm’s ability to ban the purchase of shares in hotly debated stocks.

Furthermore, Keith Gill also known as ‘Roaring Kitty’, is under investigation along with Reddit and Wall Street Bets social media posts for potential fraud. The concern is that such posts were part of a manipulative effort to drive up share prices.

How has the market reacted?

Meanwhile, after the overall market sputtered two weeks ago in response to this new phenomenon, last week we saw ‘game on’ as the Russell 2000, the S&P 500 and Nasdaq 100 all traded to new all-time highs.

Hence, the rocket ship we drew around the GameStop chart reflects the rocket ship the market is now experiencing.

Here is a case where regulation has fueled the current rally. Low interest rates by the banks, low taxes by the last administration and more stimulus checks on the way courtesy of the new administration, all contrive to fuel a surging stock market.

So is it ‘game on’ regardless of what GameStop does from here?

We are focused on the small caps, transportation, and retail sectors for best clues. Transportation using the ETF IYT has gone back to a bullish phase after flashing a warning signal. Now it has to stay there as best sign for the economy recovering on the demand side. Small caps (IWM) are the granddaddy of the economy-and they look incredible after Friday’s performance to new highs. Finally, retail (XRT) factoring in GME in the XRT basket, has some more work to do, but appears to be heading in the right direction.

Bio

Michele 'Mish' Schneider currently serves as Director of Trading Research and Education at MarketGauge.com. She writes and produces daily market analysis in "Mish's Daily", and serves as a developer and trading mentor in several of our trading services, drawing on her 30+ Years of Trading and Teaching Experience.

Mish is a former floor trader on several New York Commodity Exchanges, including Coffee, Sugar and Cocoa NYMEX and FINEX in NYC. While on the trading floor Mish also served as a market analyst for two of the largest commodity trading  firms at the time - Continental Grain, and Conti-Commodities.

Mish also wrote the best-selling finance book, Plant Your Money Tree; A Guide To Growing Your Wealth.