GameStop
GameStop’s stock surge this year, triggered by speculators in online forums such as Reddit and exacerbated by investors who bet big that the stock would fall only to see it rise, has caught Washington’s eye.
Sen. Elizabeth Warren, D-Mass., called for tighter regulations Wednesday. “For years, the same hedge funds, private equity firms and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price,” she tweeted The shares more than doubled Wednesday to $347.21, after starting the year at $17.25.
The surge has also caught the eye of the new Biden administration. "Our economic team, including Secretary Yellen and others, are monitoring the situation," White House press secretary Jen Psaki told reporters Wednesday, according to The Wall Street Journal.
Psaki added that the stock market's surge was a reminder of how markets don't necessarily reflect the health of the overall economy, The Journal said. "It doesn't reflect how working and middle class families are doing.”
Securities and Exchange Commission staff is likely looking into the trading activity and messages on Reddit, Brad Bennett, a former enforcement chief at the Financial Industry Regulatory Authority, told The Journal Wednesday.
“If it is just folks whipping each other into a frenzy on the internet, it is hard to find a violation,” Bennett told The Journal. “But if you have people putting information out on a website, and these are stock pickers selling into the frenzy and they are not disclosing that, it can be fraud.”
The demand among individual investors has overwhelmed online brokerages, The Journal said. TD Ameritrade told investors Wednesday it was blocking some GameStop trades, The Journal said.
What caused the surge?
“Pinpointing the origins of the GameStop frenzy is difficult, but signs of individual investor interest began to emerge in earnest in 2019 on Reddit forums," The Journal reported. "At the time, some users began posting screenshots of bullish options positions and debating why the stock could rise.
“That same year, one Reddit user posted in March that the company was a ‘deep-value play.’ Another Reddit user noted at the time that Michael Burry, the investor who famously bet against mortgage securities before the late-2000s financial crisis, had built a stake in the company through his investment firm Scion Asset Management LLC.
“Mr. Burry ‘is trying to start an epic short squeeze,’ one user posted on an investing Reddit forum in August 2019, a reference to a phenomenon that occurs when a stock’s price begins rising, forcing bearish investors to buy back shares that they had sold short to curb their losses.
“By 2020, chatter about a possible short squeeze had moved beyond just a working theory among a few users. Post after post noted the elevated short interest in GameStop stock, with one user in April 2020 predicting it would be the ‘biggest short squeeze of your entire life.’ Even more, many users predicted, new consoles including the PlayStation 5 were coming in late 2020. That alone, they thought, could help lift the share price of the struggling videogame retailer that had already begun closing stores around the globe.”
Reddit meme
Here’s a longer story Wednesday in The Journal about individual investors who are using Reddit and other forums to pump stocks.
Headlined “The power dynamics are shifting on Wall Street. Individual investors are winning big—at least for now—and relishing it," the story says:
“An eye-popping rally in shares of companies that were once left for dead including GameStop Corp. GME 133.13% , AMC Entertainment Holdings Inc. AMC 300.81% and BlackBerry Ltd. has upended the natural order between hedge-fund investors and those trying their hand at trading from their sofas. While the individuals are rejoicing at newfound riches, the pros are reeling from their losses.
“Long-held strategies such as evaluating company fundamentals have gone out the window in favor of momentum. War has broken out between professionals losing billions and the individual investors jeering at them on social media. Meanwhile, the frenzy of activity is stirring regulatory and legal concerns.
“The newbie investors are gathering on platforms like Reddit, Discord, Facebook and Twitter. They are encouraging each other to pile into stocks, bragging about their gains and, at times, intentionally banding together to intensify losses among professional traders, who protest that social-media hordes are conspiring to move stock prices."