New York — GameStop stock plummeted on Thursday, trimming a huge rally, after moves by brokerages to curb trading of the stock on their apps whipped up volatility and enraged the company’s retail fan base.
The stock fell as much as 68% after Robinhood, Interactive Brokers and others took steps to curtail activity in several high-flying stocks, including GameStop and AMC Entertainment. The stock was down 22% to $270.01 in New York midafternoon, triggering at least 17 trading halts.
The moves resulted in howls of outrage on Reddit’s WallStreetBets forum, which has been the launching point for many of this week’s blistering rallies, and Robinhood was hit by lawsuits from customers. It also prompted Democrat and Republican legislators to criticise restrictions imposed on retail investors.
The clampdown by brokerages extended beyond GameStop to other highflying stocks such as BlackBerry that have surged this week, burning short sellers and hedge funds. The phenomenon attracted the attention of regulators on Wednesday, with the Securities and Exchange Commission saying it was monitoring the situation.
“I’m actually surprised that trading platforms are getting involved,” said Wedbush Securities analyst Michael Pachter. “Unless there is something screwy about the trading that suggests manipulation, they really should get out of the way and allow investors to trade whatever they wish.”
For a brief moment on Thursday morning, GameStop became the biggest stock on the Russell 2000, taking over from Plug Power. The video-game retailer has advanced more than 1,300% this year, fuelling a rally in retail trading across the board and leading some short sellers to throw in the towel. However, that rally seemed to stall out on Thursday.
“With a company like GameStop, at some point it comes back to Earth. Even the folks on Reddit know that,” said Jerry Braakman, chief investment officer of First American Trust in Santa Ana, California, which manages about $2bn. “The market’s going to find the right price, the price that’s not a short-term squeeze price.”
Trading has remained volatile since the last regular US session, in which the stock rose 135%. Gains were briefly pared post-market after the Reddit page that has fuelled this month’s surge was made private and then later reopened by the group’s moderators. In the time the original WallStreetBets board was down, another forum called Wallstreetbetsnew topped 350,000 members.
“This will burn itself out, like any other mania, but there will probably to be some impact on the market as a whole,” said Marshall Front, chief investment officer at Front Barnett Associates. “That these eye-popping moves happen after a nearly 70% move in the S&P since March shows there’s plenty of room for a pullback.”
Shorts exit
Gamestop’s rise has prompted analysts at Citigroup to warn investors that some exchange traded funds face an outsized influence from the video-game retailer as its boom has altered their composition.
Analyst Scott Chronert advised clients to take “special note” of ETFs that incorporate leverage in their funds. A larger allocation to the stock may materially change fund performance for now until rebalance dates occur, he said in a report.
The Reddit community has dominated equities trading all week as retail traders target heavily shorted shares, causing ripples across the market.
Investors including Melvin Capital closed out its short position on GameStop, while Muddy Waters’s Carson Block said he “massively reduced” its short positions in recent days to avoid getting burnt.
Bloomberg
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