Outrage as curbs limit buying and selling
GameStop shares plummeted, snapping a dizzying six-day rally and wiping out nearly US$11 billion in market value after brokerages choked off demand for the stock by curbing trading on the apps used by the company’s zealous fan base.
The stock plunged 44 per cent on Thursday (US time) after Robinhood Markets, Interactive Brokers Group and others took steps to curtail activity in several high-flying stocks, including GameStop and AMC Entertainment Holdings. E*Trade Financial is preventing customers from purchasing shares of both firms, according to a person familiar with the matter.
However, GameStop shares jumped in extended trading after Robinhood said it planned to allow limited buying of certain securities on Friday. “We’re beginning to open up trading for some of these securities in a responsible manner,” the firm said.
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 criticise restrictions on retail investors.
Democrat Sherrod Brown, the incoming Senate banking chairman, said he planned to hold a hearing on the “current state of the stock market”.
“People on Wall Street only care about the rules when they’re the ones getting hurt,” said Brown. “American workers have known for years the Wall Street system is broken — they’ve been paying the price.”
Republican senator Pat Toomey said it was “very disturbing that a platform would suddenly freeze out investors . . . people should be free to make the investment decisions they choose.”
The clampdown by brokerages extended beyond GameStop to other popular stocks such as BlackBerry that have surged this week, burning short sellers and hedge funds. Shares in GameStop, a video game retailer, have risen more than 900 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 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 around US$2b.
“The market’s going to find the right price, the price that’s not a shortterm squeeze price.”
Gains were briefly pared after the Reddit page that has fuelled this month’s surge was made private, and later reopened by the group’s moderators. In the time the original WallStreetBets board was down, an alternative forum called Wallstreetbetsnew topped 350,000 members.
“This will burn itself out, like any other mania, but there will likely be some impact on the market as a whole,” said Marshall Front, chief investment officer at Front Barnett Associates.
GameStop’s rise has prompted analysts at Citigroup to warn investors that some exchange-traded funds (ETFs) 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.
“It’s hard to say what is next, but the chatroom investors may not go away so easily,” said Joseph Feldman, analyst at Telsey Advisory Group. He double-downgraded the stock to underperform from outperform on Monday.
With a company like GameStop, at some point it comes back to Earth. Even the folks on Reddit know that.
Jerry Braakman, First American Trust