GameStop , AMC Entertainment and BlackBerry shares sank on Thursday as online brokerages Robinhood Markets Inc 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 dropped 60 per cent. GameStop lost 23 per cent Wall Street’s main indexes rose.
GameStop, the video game retailer whose 1,700 per cent rally has been at the heart of the slugfest in the past week, initially rallied to more than US$480 a share, Refinitiv data showed. It was last at US$265.
“The Robinhood ban on those stocks have put a pretty good end to (the rally),” said Dennis Dick, proprietary trader at Bright Trading LLC 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.”
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 JUMPS
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 eight 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 favorites 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 Ltd and AMC drew some to call for regulatory scrutiny.
“In terms of short interest being monitored, the U.S. 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.
SHORT SQUEEZE
U.S. equity markets rebounded more than one 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 – fueled a two 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 US$71 billion from positions in U.S. 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, fueled by a constant flow of newly created money from major central banks, has made it less risky to bet on shares rising.
The U.S. 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 galvanize 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.
(Reporting by Sagarika Jaisinghani, Shriya Ramakrishnan, Medha Singh, Ismail Shakil Sruthi Shankar and Sanjana Shivdas in Bengaluru, Michelle Price, Anna Irrera, Saqib Iqbal Ahmed and April Joyner in New York; and Thyagaraju Adinarayan in London; additional reporting by Chuck Mikolajczak, Jeff Lewis, Tracy Rucinski, Devik Jain, Ankit Ajmera Writing by Patrick Graham and Nick Zieminski; Editing by Saumyadeb Chakrabarty and David Gregorio)
With files from Global News
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