GameStop and AMC Entertainment shares sank on Thursday (US time) as online brokerages Robinhood Markets and Interactive Brokers restricted trading in several social-media driven stocks that had soared this week. The trading frenzy shook stock markets in the United States and elsewhere as heavily-shorted stocks rallied, then sold off. The tug-of-war has pitted hedge funds and other short sellers against retail buyers, many motivated by commentary on sites such as Reddit.
AMC stock is 50 per cent lower in afternoon trade on Wall Street while GameStop has lost 32 per cent. GameStop, the video game retailer whose 1700 per cent rally has been at the heart of the slugfest in the past week, initially rallied to more than $US480 a share, Refinitiv data showed. It was last at $US238.
“The Robinhood ban on those stocks have put a pretty good end to (the rally),” said Dennis Dick, proprietary trader at Bright Trading in Las Vegas.
“Everybody’s trying to hit the exit button at the same time. When you start spooking all the short-sellers, there’s nobody that keeps prices in check anymore.”
However Wall Street’s main indexes rebounded across the board after Wednesday’s heavy losses, with the S&P 500 up 1.9 per cent, the Dow Jones adding 1.7 per cent and the Nasdaq 1.5 per cent higher in mid-afternoon trade. The ASX is poised to follow suit, with futures at 5.08am AEDT pointing to a jump of 84 points, or 1.3 per cent, at the open.
Robinhood also restricted trading in BlackBerry, Koss and Express, citing “recent volatility.” It faced a barrage of criticism from retail investors, celebrities and policymakers.
Interactive Brokers, another online trading platform, also restricted trading in those stocks.
“We do not believe this situation will subside until the exchanges and regulators halt or put certain symbols into liquidation only,” it said.
On Twitter, many observers argued trading platforms were trying to protect Wall Street interests at the expense of retail investors.
“Robin Hood: a parable about stealing from the rich to give to the poor. Robinhood: an app about protecting the rich from being short squeezed by the poor,” tweeted Jake Chervinsky, a lawyer for fintech company Compound.
Robinhood has seen business boom during the coronavirus pandemic as more home-bound consumers took to trading stocks online. The app now counts more than 13 million users.
Social media chatrooms are beginning to resemble the squawk boxes on trading floors as a new generation of retail traders gains influence.
American Airlines joined the list of stocks making gains as small-time traders broadened their battle with major Wall Street institutions, but it, too, was well off earlier highs as Robinhood restricted trading.
Shares in American Airlines jumped 8 per cent. It reported earnings but investors said those were not enough to explain its stock move.
“It’s irrational day-trading, nothing fundamental. Same as GameStop, Tootsie Roll, Virgin Galactic, etc,” said Darryl Genovesi, Vertical Research analyst.
As the “Reddit crowd” has roiled the market, a basket of stocks traded mostly by hedge funds has fallen 2.5 per cent so far this year while a basket tracking retail favourites jumped 13.5 per cent, data from Goldman Sachs showed.
Before its retreat, GameStop briefly became the biggest stock on the Russell 2000 index of small caps, according to Zerohedge.
Dramatic jumps in GameStop, BlackBerry and AMC drew some to call for regulatory scrutiny.
“In terms of short interest being monitored, the US markets are probably the most transparent, but there’s always room for improvement,” former SEC chairman Jay Clayton told CNBC.
Silver industry shares also caught traders’ attention. Canada’s First Majestic Silver was halted briefly in New York after shares rose more than 30 per cent.
Heavily-shorted stocks were also active in Australia and Europe.
US equity markets rebounded more than 1 per cent early. On Wednesday, the short squeeze – where a rising stock price forces traders to abandon loss-making “short” bets that it will decline – fuelled a 2 per cent slide in New York’s S&P 500 as investors sold other assets to cover their losses.
Short-sellers are sitting on estimated losses of $US71 billion ($92.4 billion) from positions in US companies this year, data from analytics firm Ortex showed.
In one Reddit discussion, thousands of participants responded “We love this stock” to a post that called for more buying of GameStop.
The war began last week when hedge fund short-seller Andrew Left of Citron Capital bet against GameStop and was met with a barrage of retail traders betting the other way. He said on Wednesday he had abandoned the bet.
Long derided by market professionals as “dumb money,” the pack of traders, some of them former bankers working for themselves, has become an increasingly powerful force worth 20 per cent of equity orders last year, UBS data showed.
The constant march upward of stock markets over the past decade, fuelled by a constant flow of newly created money from major central banks, has made it less risky to bet on shares rising.
The US Federal Reserve kept those taps firmly open at this week’s meeting.
The market turmoil caught the attention of the White House, with President Joe Biden’s economic team – including Treasury Secretary Janet Yellen – “monitoring the situation.”
Massachusetts state regulator William Galvin called on NYSE to suspend trading in GameStop for 30 days to allow a cooling-off period.
“The prospect of intervention here is clearly high, but this will just galvanise the (WallStreetBets) community as it just brings home the feeling of inequality in financial markets,” said Chris Weston, head of research at broker Pepperstone in Melbourne.
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