Trading curbs draw ire as GameStop plummets
GameStop Corp. plummeted on Thursday, wiping out a chunk of a rally posted over a dizzying six-day period, after moves by brokerages to curb trading of the stock on their apps whipped up volatility and enraged the company's retail fanbase.
The stock plunged as much as 68 per cent Thursday after Robinhood Markets, Interactive Brokers Group Inc. and others took steps to curtail activity in several high-flying stocks, including GameStop and AMC Entertainment Holdings Inc. E*Trade Financial is preventing customers from purchasing shares of both firms, according to a person familiar with the matter.
Shares of the video-game retailer ended the day down 43.2 per cent to US$197.44 in New York after at least 18 volatility halts. Volume also fell, with about 49 million shares traded by Thursday afternoon, a far cry from Friday's record of 197 million.
The trading curbs 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 lawmakers to criticize restrictions imposed on retail investors. Democratic Sen. Sherrod Brown, the incoming Senate banking chairman, said he plans to hold a hearing on the “current state of the stock market.”
The clampdown by brokerages extended beyond GameStop to other popular stocks such as BlackBerry Ltd. that have surged this week, burning short sellers and hedge funds. The phenomenon attracted the attention of regulators Wednesday, with the Securities and Exchange Commission saying it was actively monitoring the situation.
“The inability to trade depressed the volume, and high volume is what kept the stock trading at a high level,” said Wedbush Securities Inc. analyst Michael Pachter. “I'm actually surprised the trading platforms think they can manage the market this way, and expect they will reverse their decision shortly.”
For a brief moment Thursday morning, GameStop became the biggest stock on the Russell 2000, taking over from Plug Power Inc. The video-game retailer has advanced more than 1,100 per cent 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, Calif., which manages around US$2 billion. “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 U.S. session, in which the stock rose 135 per cent. Gains were briefly pared postmarket 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, an alternate forum called Wall street bets new topped 350,000 members.
“This will burn itself out, like any other mania, but there will likely 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-per-cent move in the S&P since March shows there's plenty of room for a pullback.”
GameStop shares would be worth US$125.75 in a best-case scenario, roughly half of where it was trading midday Thursday, said Baird analyst Colin Sebastian. That assumes a successful transition that maintains its current market share, preserves its usedgame business, and diversifies into other services, he wrote in a report.
Sebastian laid out four different scenarios for the stock, ranging from “bright blue sky” to “storm cloud.” Baird has a US$13 share price target with a hold-equivalent rating.
GameStop's rise has prompted analysts at Citigroup Inc. 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 to avoid getting burned.