NEW YORK (Reuters) – The prices of so-called meme stocks may be skewed because the majority of trades in these names are done outside of the public exchanges where stock pricing takes place, the New York Stock Exchange chief said Wednesday.
“Meme stocks”, which often start out as low-valued, high-selling stocks behind which users of online forums like Reddit’s WallStreetBets recover, are among the most heavily traded and volatile stocks on any given day.
Stocks of companies like video game retailer GameStop Corp and theater chain operator AMC Entertainment have skyrocketed this year, with GameStop rising more than 1,600% in January alone, leading to trading bans at some brokers and hearings in front of Congress and regulators .
“With some of the meme stocks we’ve seen, or stocks with high retail participation, the vast majority of the order flow can be traded off-exchange, which is problematic,” said Stacey Cunningham, president of Intercontinental Exchange Inc. NYSE.
“This pricing doesn’t really reflect supply and demand,” she said at a conference hosted by CNBC.
Retail trade spiked during the coronavirus pandemic, aided by a switch by retail brokers to commission-free trading, with individual traders now responsible for around 35% of the market volume, up from 20% before the pandemic.
For meme stocks, individual traders contribute up to 70% of the volume, Cunningham said.
The majority of retail orders bypass exchanges due to an arrangement called pay for the flow of orders, in which retail brokers sell their clients’ marketable orders to wholesale brokers. Wholesalers match orders internally and try to take advantage of the bid-ask spread while offering retailers the best market price or better.
Retail brokers say paying for order flow lowers the overall cost for individual traders.
However, the practice raises conflict of interest questions and will be included in a full review of exchange rules, Gary Gensler, chairman of the US Securities and Exchange Commission, said last week.
The review will also examine whether over-the-counter trading – which accounts for about 50% of the market when institutional block deals are taken into account – skews the pricing mechanism for stocks, Gensler said.
Reporting by John McCrank in New York; Editing by Matthew Lewis