By Sagarika Jaisinghani and Medha Singh, Reuters
Shares of GameStop and AMC Entertainment Holdings each more than doubled on Wednesday, forcing hedge funds to take heavy losses as they unloaded short positions, sparking calls for scrutiny of anonymous stock market trading posts on social media.
The short squeeze was so sharp that funds were selling long positions in stocks to pay for the losses, which sparked a 1% slide in Wall Street’s main indexes. [.N] The Goldman Hedge Industry VIP ETF, which tracks hedge funds’ most popular stocks, has fallen for five straight sessions, its longest losing streak since February 2020.
Short-seller Citron said in a video post it had abandoned its bet on GameStop shares falling after the video game retailer’s value soared almost tenfold in a fortnight. Citron has been a target for some individuals on Reddit’s “WallStreetbets” thread who helped drive gains for several niche stocks.
With commentators and lawyers calling for scrutiny of the moves, Nasdaq chief Adena Friedman said exchanges and regulators needed to pay attention to the potential for “pump and dump” schemes driven by chatter on social media.
“If we see a significant rise in the chatter on social media … and we also match that up against unusual trading activity, we will potentially halt that stock to allow ourselves to investigate the situation,” Friedman said on CNBC, responding to a question after the exchange’s financial results.
“If we do think or contemplate that there may be some manipulation, we then engage with FINRA and the SEC to evaluate and investigate that.”
The Securities and Exchange Commission (SEC) declined to comment. GameStop and AMC are both listed on the New York Stock Exchange.
Mainstream commentators have questioned moves in several Reddit-hyped stocks in recent days, at a time when some on Wall Street wonder if months of stellar overall gains have driven share prices across the market into bubble territory.
GameStop’s stock has surged nearly 700% in two weeks, lifting the struggling video game retailer’s market value from $1.24 billion to more than $10 billion. BlackBerry Ltd soared 185% on Tuesday, on course for its biggest monthly gain ever.
GameStop surged another 146% to $365 by midday on Wednesday, while AMC’s stock more than tripled to $16.50, at a time when the broader stock market was down more than 1%.
Along with Nokia Oyj, the companies were among the most heavily traded stocks, with Reddit discussion threads again humming with chatter about the stocks.
“These are not normal times and while the (Reddit) … thing is fascinating to watch, I can’t help but think that this is unlikely to end well for someone,” Deutsche Bank strategist Jim Reid said.
BlackRock Inc, the world’s largest asset manager, could have made gains of about $2.4 billion on its investment in GameStop. It owned about 9.2 million shares, or a roughly 13% stake, in GameStop as of Dec. 31, 2020, a regulatory filing showed on Tuesday.
But extreme volatility means investors stand to lose money, said Matthew Keator, managing partner in wealth management firm the Keator Group in Lenox, Massachusetts.
“It’s a dangerous game to play from both sides of the spectrum, whether you’re long or short. You get close enough to the fire you’re going to get burned,” he said. “At some point in time, valuation is going to matter and it won’t matter what social media is cheering the stock on.”
Direct investment has boomed in the past year thanks to easy access apps like Robinhood.com, which allow ordinary Americans to make stock market trades at almost no initial cost, while trillions of dollars in stimulus also drove markets higher.
On GameStop, the retail investor army has gone toe-to-toe with institutional short-sellers, a traditional area for hedge funds, who bet on falls in shares of companies they judge as weak.
The 20 small-cap Russell 2000 index companies with the biggest bearish bets against them have risen 60% on average so far this year, easily outperforming the rest of the market, a Reuters analysis of Refinitiv data shows.
Early on Tuesday, short sellers in GameStop were down $5 billion on a mark-to-market, net-of-financing basis in 2021, according to analytics firm S3 Partners.
Another fund, Melvin Capital, said it had closed out its short position in GameStop on Tuesday afternoon after taking a huge loss.
Barron’s reported late on Tuesday that the top securities regulator in Massachusetts believes trading in GameStop stock suggests there is something “systemically wrong” with the options trading around the stock.
Others say that the trades are at the end of the day up to the investors who make them.
“That’s the sentiment, the public doing what they feel has been done to them by institutions,” Reddit co-founder Alexis Ohanian said in a tweet on Wednesday. “I know they’re all ‘random people on the internet’ but there’s a lot more empathy and community there than people realize.”