GameStop, that rather dull video game retailer that seemed to more or less be treading water even before the pandemic, has suddenly become so wildly volatile that Robinhood has moved to limited trades.
This is where the war between Wall Street and the growing hoards of small, retail investors became very real.
Small retail investors suddenly joined forces to push GameStop stock to amazing new heights, going to under $20 to a high of $483 on Tuesday morning, before closing Thursday at $197.44 as the front line shifted swiftly. But the euphoria didn’t last long, with Gamestop falling to just $90 by the end of today’s trading day.
This is the power of social media at a time when small, retail investors are pouring into stocks for the first time, partly thanks to “democratizing” zero-fee apps such as Robinhood.
Trading took an unexpected turn when small, retail investors banded together on social media to challenge the big institutions who had placed bets that the stock would fall.
It’s a challenge Wall Street never thought it would be up against, and the claws have come out, and this is where we see the short-sellers show their true colors.
Earlier, short-sellers Citron Research and Melvin Capital had placed bets that GameStop shares would fall as the company struggles to transform itself from a bricks and mortar retailer to online seller.
But smaller investors weren’t having it. They rallied to the stock. The collective group of Reddit users from the WallStreetBets subreddit bought the stock as hedge funds were attempting to short it.
According to CNN, Citron Research has now given up on shorting the stock, citing harassment by the stock’s backers. Melvin Capital also closed out its short position in GameStop after taking a huge loss.
Elon Musk, CEO of Tesla, which short-sellers targeted and lost $38 billion last year, also commented on the GameStop “game”.
The Reddit community has also turned its eyes on BlackBerry and AMC, attempting to pull the same trick.
The frenzy over GameStop stock has led most retail brokerages such TD Ameritrade, Interactive Brokers, Charles Schwab and Robinhood to restrict new purchases of GameStop and some other stocks. Others restricted include AMC, Nokia, American Airlines, Tootsie Roll, and Bed, Bath and Beyond.
Trading of its shares was temporarily halted by the New York Stock Exchange nine different times to contain the volatility.
“We broke it. We broke GME at open,” one Reddit user wrote after the NYSE halted trading.
On its website, Robinhood wrote that “in light of recent volatility, we are restricting transactions for certain securities to position closing only”. However, according to the decision, hedge funds could buy and sell, but on many platforms, retail investors could only sell, which was hardly fair.
The move to restrict trading also created bipartisan anger, where officials from both political parties have called out the situation as favoring Wall Street.
Representative Alexandria Ocasio-Cortez said she would support a probe on the brokerages’ decision--an idea welcomed by Senator Ted Cruz.
U.S. Representative from California, Ro Khannna, supported the small investors’ rights to buy just like hedge funds.
“This entire episode has demonstrated the power of technology to democratize access to American financial institutions, ultimately giving far more people a say in our economic structures,” he wrote.
Even though Robinhood wasn’t the only one to restrict buying on GameStop stock, its actions were seen as a fundamental betrayal of its users, with a median customer age of 31.
Aside from its name's meaning, it’s pioneering zero-fee commissions policy inspired a new generation of traders to throw their hat in the investment ring. The start-up grew from one million subscribers in 2016 to six million accounts in 2018, and this year said it had topped 13 million. Just last year, Robinhood added 3 million accounts, with half of them first-time traders.
On Thursday, the company was hit with a class action lawsuit led by user Brendon Nelson after it restricted buying of stocks that were popularized on a Reddit web forum.
Nelson filed the suit on behalf of all Robinhood users in the U.S. and is asking a federal judge to require the app to immediately reinstate the stock to the trading platform.
By Fred Dunkley for Safehaven.com