A GameStop store in New York.
The dominant force on Wall Street is shifting. Retail investors have won big, at least temporarily, and are enjoying the victory.
Stocks of companies including GameStop Corp.(GME), AMC Entertainment Holding Inc.(AMC) and BlackBerry Ltd.(BB), which were once considered hopeless, have recently come out on a jaw-dropping rally that has also The traditional order between hedge funds and retail investors has been overturned. While retail investors are cheering for profits, the aforementioned professional investment institutions are swallowing losses.
Traditional strategies such as evaluating company fundamentals were left behind and market momentum became king. There was a fierce battle between professional institutions and retail investors, with the former losing billions of dollars and the latter taking to social media to heap scorn on institutions. And at the same Time, this frenzied trading activity is raising regulatory and legal concerns.
These online investment novices huddle on Reddit, Discord, Facebook and Twitter to encourage each other to buy stocks and brag about their winning results, sometimes joining forces intentionally to make professional traders lose big. These traders protest that these online armies are conspiring to manipulate stock prices.
Andrew Left of short-selling firm Citron Research has been targeted by some investors on social media. He said, “I didn’t think it would be this frenzied.” He added, “It’s a ploy to make a quick buck.”
Since the beginning of January, social media content involving GameStop, AMC and BlackBerry has reached hundreds of thousands of entries, and these stocks are among the most actively traded stocks in the U.S. financial markets.
The huge gains have forced investment managers to close positions betting on the declines of these stocks, an action that in turn has amplified the rally in these stocks. Short sellers have lost $9.3 billion on GameStop alone this year, according to financial analyst firm S3 Partners, including a $5 billion loss to short sellers from Tuesday’s surge in the stock. gameStop jumped 93 percent to a new high of $147.98 on Tuesday, extending the stock’s cumulative January gain to 685 percent to that point.
GameStop’s shares soared as high as $380 on Wednesday, bringing the video game retailer’s market value to $26.5 billion at one point, surpassing that of Delta Air Lines Inc.
Daftarian, 44, said he used to think stock trading was the job of professionals sitting in big city skyscrapers, but he also started speculating during last year’s stock market crash.
Sam Daftarian, 44, was a law school student not long ago. He says, “There’s never a guy in the movies sitting on a hill in Brisbane in his pajamas. Photo credit: SONIA EJTEHADIAN
Stocks that have made Daftarian money recently include troubled movie theater chain operator AMC, whose stock jumped 26 percent Monday in a volatility rarely seen in the company’s history. Daftarian bought more than $1,000 worth of AMC shares last year when the company’s stock price was hovering around $4. He also invested a modest amount in AMC options, which are expected to more than double in value in the near future as AMC struggles to avoid bankruptcy.
Daftarian said he wouldn’t have tried to get an online law or undergraduate degree if he had previously realized how lucrative stock trading could be. “Please tell the wolves of Wall Street that the pigeons of San Francisco will eat your lunch,” he said Tuesday. AMC shares jumped another 12 percent Tuesday.
Individual investors tend to lose out on heavy bets. When oil prices unexpectedly fell into negative territory last year, individual investors suffered billions of dollars in losses, while market veterans made a fortune. Some retail brokerage platforms sell “free” trades to individual traders, but the reality can be very different. High-risk, leveraged stock market funds designed by bankers and other professionals have caused losses for individual investors.
Atlanta resident Noah Williams, 36, said he made nearly $150,000 in the past two weeks from his GameStop options position, enough to pay off more than $43,500 in remaining student loans. He began buying GameStop stock last fall, initially at $16, and currently holds about 1,100 shares. Since then, he has used the remainder of the profits from his options position to buy more GameStop stock.
Williams says, “I think one of the main points I learned from that is that fundamental analysis doesn’t apply to individual traders.” He said, “It’s entirely driven by market sentiment. The only reason tesla has the valuation it has is because people believe in the company.”
Williams recently updated his LinkedIn profile to include a title of “Short Squeeze Astronaut,” which is associated with the popular WallStreetBets forum on Reddit. Williams said he doesn’t plan to sell his shares until GameStop’s stock hits $1,000.
The demand from individual investors has made it difficult for online brokers, with companies including Fidelity Investments Inc. and Vanguard Group experiencing slow speeds or other technical glitches. Carlson Financial Group (Charles Schwab Corp., SCHW), Demerit Securities (TD Ameritrade Holding Co., AMTD) and Robinhood Markets Inc. and other brokerages have also been raising margin requirements for trading GameStop securities. This is a security volatility or risk changes when the brokerage firms will usually take the practice.
Brad Bennett, former head of enforcement at the Financial Industry Regulatory Authority (FINRA), said staff at the Securities and Exchange Commission (SEC) may be investigating trading activity and information on Reddit. He said that to prove any type of fraud, such as market manipulation, would require confirmation that traders passed false or misleading information to manipulate stock prices. A U.S. SEC spokesman would not comment.
Bennett noted, “If it’s just people talking to each other on the Internet and getting caught up in the frenzy, it’s hard to find a violation.” He said, “But if people put the news out on the Internet and the holders take advantage of the frenzy that the news creates to sell their shares and fail to disclose it all, such behavior could constitute fraud.”
The sharp rise in GameStop and AMC stock prices comes amid a relatively quiet broader market. The S&P 500 has slipped about 1.7 percent this week and is essentially flat year-to-date. In contrast, GameStop is up 417% so far this week, and AMC is up 172%.
In recent sessions, AMC has been the most actively traded stock in the entire stock market, replacing Apple Inc. (AAPL), a giant stock with a market capitalization more than 1,400 times higher. speculative options trading volume for GameStop and AMC has risen to its highest level ever, and traders are Dumbfounded.
Cinema operator AMC is struggling in the midst of an Epidemic, yet is a favorite in the Internet stock discussion. Photo credit: MARCIO JOSE SANCHEZ/ASSOCIATED PRESS
It’s hard to find the source that sparked GameStop stock’s frenzied move, but there are indications that retail investor interest in the stock began to emerge on Reddit forums in 2019. At the time, a number of users began posting screenshots of call option positions and discussing why the stock might be rising.
In March of that year, a Reddit user posted that GameStop was a “deep value stock. Another Reddit user noted at the time that Michael Burry, through his investment firm Scion Asset Management LLC, had bought a portion of GameStop, and that Burry was known for shorting mortgage-backed securities before the financial crisis of the late 2000s.
In August 2019, a user posted on a Reddit investment forum that Burry was trying to launch an epic short-rolling operation. A short roll is when a stock begins to rise forcing shorts to buy back shares they sold in a previous short sale in order to stop losses.
By 2020, the discussion of a possible short roll trade has become more than just a theory of operations among some users. Post after post pointed to large short positions against GameStop stock, with one user predicting in April 2020 that it would be “the biggest short sale you’ve ever seen in your Life. Many users even predict that new consoles such as the PlayStation 5 will be launched in late 2020. They believe that alone will help boost the stock price of the struggling gaming retailer, which has begun closing stores around the world.
By early January of this year, GameStop had gone from being a recommended stock to a phenomenon. no longer did GameStop represent just an opportunity to make a killing or a way to provide support for a struggling company. For some users, buying GameStop stock has turned into a way to fight institutional money. Some users encourage others to hold on: “Don’t sell.”
Huge Losses
The prices of heavily shorted stocks are soaring, which has ensnared some of Wall Street’s best traders. The top-ranked hedge fund, which began the year with $12.5 billion under management, had racked up losses of nearly 30 percent for the year as of Friday, largely blamed on a series of shorting operations against companies such as GameStop, according to people familiar with the hedge fund Melvin Capital Management.
Melvin founder Gabe Plotkin arranged for emergency funding to cover the losses caused by bets on companies like GameStop. Photo credit: ALEX FLYNN/BLOOMBERG NEWS
Faced with mounting losses, Melvin founder Gabe Plotkin arranged an emergency deal Monday in which Citadel LLC, its partners and Point72 Asset Management will immediately invest $2.75 billion in Melvin’s fund to stabilize its operations. The deal also provides for these outside investors to receive a three-year non-controlling share of Melvin’s income. This move effectively reduces Melvin’s reliance on borrowed funds and therefore reduces the likelihood of margin calls from Melvin’s prime broker.
Melvin held GameStop puts that expired in mid-January, and the company closed out its short GameStop position on Tuesday. Investors with put options take profits when the price of the underlying stock falls. A spokesman said in a written statement, “Melvin Capitall has rebalanced our portfolio over the past few days.” The spokesman would not comment on how much of Melvin’s loss came from GameStop.
The New York hedge fund, which began the year with about $3.5 billion in funds under management, had accumulated losses of about 30 percent for the year as of Wednesday, largely blamed on a short position in GameStop, people familiar with Maplelane Capital LLC said. The fund has adjusted its portfolio in the past two weeks to preserve capital, one of the people familiar with the matter said.
Such a sharp turnaround is rare for Maplelane, which was founded in 2010 by former Galleon Group trader Leon Shaulov. Maplelane has returned an average of 29.4% a year since its inception, according to an investor filing.
Some traders said they have been covering short positions in other stocks such as Palantir Technologies Inc. and Stitch Fix Inc. for fear those companies could become the next GameStop. others have been forced to cut their losses as stocks such as GameStop and AMC have soared, and their firms have taken steps to limit the risk of positions that fund managers can take. Hedge funds on Monday reduced their equity exposure at the fastest pace since August 2019, both cutting call positions and covering short positions, according to Goldman Sachs Group Inc.
Meanwhile, discussions about “Melvin” dominated the Reddit platform, with more than 40,000 posts related to the company circulating in the past month, according to analysis by Meltwater, a global media intelligence firm. One of the posts gloated, “We are more capable of irrational action than Melvin’s solvency.”
Retail investors are aware of their growing influence and know when to step up to the plate.
On Jan. 19, a Twitter account calling itself a WallStreetBets moderator posted that WallStreetBets had long been given the cold shoulder, but “we are now a powerful force to be reckoned with.” Some users worry that the SEC will not remain indifferent if users show signs of group action. On the Discord platform, there is a chat room associated with WallStreetBets, where one user posted Tuesday, “Guys, we’re going to give $GME a boost, and in 60 seconds, we’re all going to buy a thousand shares of it each.”
Some on WallStreetBets have targeted Left of Citron Research after he went public with his bearish stance on the company. He said he was trolled by many people on the Internet, many of whom also harassed his Family, including his children. He said many people made fun of him, calling him a “boomer.
Andrew Left, founder of Citron in 2018, has been the target of a retail investor huddle. Photo credit: BRENDAN MCDERMID/REUTERS
His bearish comments became a cue for hordes of other investors to flock to buy the stock.
Danny Faiella, a 33-year-old house painter in Hilo, Hawaii, said, “When Citron got involved, I thought this was the time I was going to get further involved.” He trades in between jobs and has put about $3,500 into GameStop stock and options. He has been buying GameStop-linked calls since last November, and those positions have quickly appreciated as the stock price has soared. After Left disclosed his positions, Faiella stepped up his trading. “I’m finding value in the stocks he’s shorting right now.”
On Wednesday, Left said in a video that he closed out most of his short positions.
While investors who were long and short stocks last year experienced one of their best years in more than a decade, they have been battered in recent years by monetary stimulus from central banks around the world and the rise of passive and quantitative investment strategies. Value investors say all of these forces have distorted the stock market.
They say social media may be the next force to consider.
GameStop’s share price spike and the pain it has caused short sellers harkens back to the Volkswagen AG share price spike in late 2008 that devastated hedge funds around the world. Volkswagen briefly became the world’s highest listed company by market capitalization, in part because fellow German automaker Porsche Automotive Holding SE announced it had increased its stake in Volkswagen and planned to gain full control of the company.
The current period of the new crown epidemic has seen a surge in retail trading activity, with a large number of investors flocking to the market, both men and women, young and old, novice and veteran, according to JMP Securities, which estimates that no fewer than 10 million new trading accounts will be created in 2020 alone.
In the eyes of market watchers, it doesn’t always make sense for retail investors to favor companies. In recent months, these investors have pushed shares of car rental service provider Hertz Global Holdings Inc. (Hertz Global Holdings Inc., HTZ) and photography company Eastman Kodak Co. (Eastman Kodak Co., KODK) soaring, while the former filed for bankruptcy protection last year and the latter is in a tough spot. Hertz was eventually delisted from the New York Stock Exchange and traded on the over-the-counter market, while Kodak shares fell more than 60 percent heavily from their 2020 highs.
This convinced many Wall Street traders that a rally like GameStop’s was ultimately feared to be short-lived.
Short-seller interest in GameStop remains strong, even as the cost of borrowing, the fee short-sellers pay to brokers to borrow stocks to short, soars. The median borrowing rate for shorting S&P 500 components is 0.3%.
S3 Partners data show that as of Tuesday after market, GameStop stock existing short positions borrowing rate of about 31%, while the “considerable” short position borrowing rate has risen to 80%. Borrowing rates for new shorts have soared to a high of 200%.
Suffering
Amid record rallies in stocks like GameStop, it’s easier than ever for investors to make options bets, so they can increase their bullish bets and, in some cases, make short sellers suffer additional pain.
Options give investors the right to buy or sell stocks in the future at a specific price. Options can be used as a trading tool to bet on stock movements or to hedge portfolio risk. Recently, many investors have been using options to quickly double, triple or even triple their money because they can get a huge return for a relatively small amount of money, although there is also the risk of suffering huge losses. Investors have been snapping up GameStop options that expire in a matter of days.
The volume of GameStop short-term call options traded and the large number of unexercised contracts has alarmed Wall Street veterans. On Friday, more than 2 million GameStop-related options contracts changed hands, a record high. options trading volume for AMC Entertainment Holdings Inc. hit a new high on Monday.
As the stock rose, traders who sold calls had to buy shares to hedge their positions. As GameStop shares soared, the value of those calls increased several times, forcing traders to buy more GameStop shares to hedge their positions.
The soaring stock price drew more traders in, fueling demand for the stock and creating a snowball effect. At the same time, self-contained funds began trading in the stock, helping to push the price higher.
Danny Kirsch, head of Cornerstone Macro’s options practice, said, “This may have fueled the short-rolling move.”
Options volume has accelerated this year after hitting a record high in 2020. According to Trade Alert, four of the five largest days of call options volume since 1973 have been in the early weeks of 2021. On Jan. 25, more than 32 million calls changed hands, making it the most active day ever for call options trading.
The stock’s trading momentum could ease and these bullish bets could quickly reverse. Traders say all the bullish options trading on the stock could exacerbate the stock’s downtrend by then.
Should this spree by retail investors be defined as market manipulation
The mob psychology-like frenzy on WallStreetBets has led some professional investors to warn.
Burry, who had drawn some early attention to GameStop, posted a tweet on Tuesday in which he said, in a now-deleted tweet, “If I recommend $GME to you and you do a great job, then I’m genuinely happy for you. However, what is happening now should bring about a legal and regulatory response. This move is unnatural, crazy and dangerous.”
Many traders have questioned whether users who post information about the company and urge others to buy stocks and calls could be considered a “group” under the SEC’s definition. Such a determination could require regulatory disclosures from investors who act together on a particular stock, restrict their trading under certain thresholds, and require them to return some short-term profits.
Hedge funds and their clients have also been asking whether such activity might be considered market manipulation.
A forum moderator said this month in a post on a stocks sub-forum that moderators of the Reddit investment and trading forum disputed the forum’s claims of market manipulation and replied to users that they strictly enforce group rules “related to promotion and pulling up shipments.
Another recent post on WallStreetBets said, “Those of us who run this community are not organized to promote, advise or recommend any stocks.” The posting said, “It is against our policy to do so, and we believe it is critical to allow members to share ideas with each other autonomously.”
Lawyers for the securities industry and regulators say lawsuits in both market manipulation and group action are not easy to fight, especially when posted anonymously online. The former raises the question of whether the SEC is willing to hold retail investors accountable or whether it will require short sellers to file lawsuits and publish their books for outside scrutiny, they said.
Video producer Jordan Laws, 40, sees WallStreetBets as a balancing force between professionals and amateurs. laws worked for Bernie Sanders’ presidential campaign last year.
Hedge funds do it all the time,” Laws said. It’s as if they haven’t had their own people come on the CNBC television channel and make comments.” Laws also said that their statements could affect the market.
He bought call options tied to AMC after seeing GameStop shares rise and tracking ongoing discussions about it on Reddit and Discord. The value of those options has risen, but he thinks there is more upside.
Laws said, “I’m waiting for the rider to show up.”
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