A battle between day traders and Wall Street pros over the soaring share price of GameStop is set to continue.
Shares in the loss-making video games retailer were up around 16% in New York, adding to massive gains seen earlier this week.
Professional investors have lost large sums after betting billions of dollars that GameStop’s shares would fall.
But buying by amateur investors, swapping tips on social media sites like Reddit, pushed up the share price.
Shares in GameStop have now risen more than 700% since last week, and regulators are monitoring trading amid fears of illegal market manipulation.
But the amateur investors say they are just playing Wall Street at its own game.
Why are GameStop shares surging?
Key to what’s going on is “short selling” or “shorting”, where a big investment company such as a hedge fund tries to make money by betting that a company’s share price will fall.
The hedge fund borrows shares in a company from other investors (for a fee) and sells the shares on the markets at, for example, $10 each, waits until they fall to $5, and buys them back. The borrowed shares are returned to the original owner, and the hedge fund pockets a profit.
GameStop – which saw heavy losses last year and was described as “failing” by one big investor – is the most shorted stock on Wall Street. Some 30% of its shares are thought to be in the hands of hedge fund borrowers.
But in the last week, amateur investors who follow the Wall Street Bets forum on Reddit have poured money into buying the company’s stock with the aim of pushing up the price.
If the price rises dramatically, short sellers face big losses and they need to buy back the shares they have borrowed quickly to prevent bigger losses – a process known as covering.
However, buying back the shares only adds to demand for the stock and pushes its price higher still.
Is GameStop the only company targeted?
The amateurs are now targeting other companies that have been heavily shorted by hedge funds, including AMC Entertainment, Koss Corp and BlackBerry. These firms saw their share prices jump on Wednesday, only to fall back overnight.
In the UK, shares in Pearson and Cineworld rose amid speculation they could be next in line from Reddit’s army of day traders. However, shares in both companies fell in early trading on Thursday.
The Sydney Morning Herald reported that a tiny West Australian mining company saw a 50% surge in its share price, most likely due to its Australian stock exchange (ASX) code matching that of the American video game retailer.
However, some traders have made a lot of money. Even with the overnight fall, GameStop shares were selling at $292, compared with less than $20 just a few weeks earlier.
Day traders beat the pros
The massive GameStop share surge appears to be less about the company – which is a loss-making bricks-and-mortar gaming retailer – and more about a fight between Wall Street fund managers and individual investors organising online.
Analyst Neil Wilson says that from reading the Reddit chat threads, the day traders’ battle with Wall Street is clearly personal.
“Among the many aspects of this story that are strange, what is so unusual is the peculiar vigilante morality of the traders pumping the stock. They seem hell-bent on taking on Wall Street, they seem to hate hedge funds and threads are peppered with insults about ‘boomer’ money.
“It’s a generational fight, redistributive and all about robbing the rich to give to the millennial ‘poor’.”
Technology investor Chamath Palihapitiya told CNBC: “We are moving to a world where ordinary folk have the same access as professionals and can come to the same conclusion or maybe the opposite.
“The solution is more transparency on the institutional side, not less access for retail.”
Regulators are watching
The GameStop issue has also caught the attention of the White House and other officials.
Press secretary Jen Psaki said President Joe Biden’s economic team, including newly-appointed Treasury Secretary Janet Yellen, was “monitoring the situation”.
US stock exchange Nasdaq’s chief executive Adena Friedman said exchanges and regulators should watch whether anonymous social media posts could be driving “pump and dump” schemes.
“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,” Ms Friedman said on CNBC.
Jacob Frenkel, a former lawyer at the Securities and Exchange Commission, the main US financial regulator, said: “Such volatile trading fuelled by opinions where there appears to be little corporate activity to justify the price movement is exactly what SEC investigations are made of.”
The share trading has, so far, been confined minor companies and has created no volatility in the wider financial markets.
However, several share trading platforms, including TD Ameritrade, Robinhood and E*Trade experienced outages as the number of retail trades soared amid interest in previously forgotten shares.
Ameritrade announced it would place “several restrictions” on GameStop and a number of other securities “out of an abundance of caution amid unprecedented market conditions and other factors”.
Massachusetts state regulator William Galvin called on the New York Stock Exchange to suspend GameStop for 30 days to allow a cooling-off period. “This isn’t investing, this is gambling,” he said in an interview. “This is obviously contrived.”