NEW YORK, June 16 (Reuters) – The prices of so-called meme shares may be distorted because the majority of trades in those names are conducted away from public exchanges where stock price formation occurs, the head of the New York Stock Exchange said Wednesday.
Shares in companies such as video game retailer GameStop Corp (GME.N) and theater chain operator AMC Entertainment (AMC.N) have whipped up this year, with GameStop only picking up more than 1,600% in January, leading to a halt in trading from some brokers and triggering legislative consultations.
“In some of the meme stocks we’ve seen, or stocks that have a high level of retail participation, the vast majority of the order flow can trade from exchanges, which is problematic,” said Stacey Cunningham, president of Intercontinental Exchange Inc’s ( ICE.N) NYSE.
“This price formation does not really reflect what supply and demand are,” she said at a conference hosted by CNBC.
Retail sales rose sharply during the coronavirus pandemic, aided by a shift from retail brokerage to commission-free trading, with individual retailers now responsible for around 35% of market volume up from 20% before the pandemic.
In meme stocks, individual traders contribute as much as 70% of the volume, Cunningham said.
The majority of retail orders bypass exchanges due to a scheme called payment flow order, where the retail brokerage company sells their clients’ negotiable orders to wholesale brokers. The wholesalers match the orders internally and try to make a profit from the bidding question while offering retailers the best market price or better.
Retail brokers say that paying for order flow lowers the total cost to individual retailers.
But this practice raises issues of conflict of interest and will be included in a broad review of stock market rules, Gary Gensler, chairman of the U.S. Securities and Exchange Commission, said last week.
The review will also examine whether off-exchange trading – which is around 50% of the market when institutional block trading is included – distorts the stock discovery mechanism, Gensler said.
Reporting by John McCrank in New York Editing by Matthew Lewis
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