Markets

GameStop shares suffer sudden reversal after trading limits imposed

Stock had made wild gains for small traders and big losses for Wall Street

The traders who had piled into GameStop were part of a frenzy that originated on a Reddit message board. Photograph: EPA. Photograph: Alessia Pierdomenico/Bloomberg

Thu Jan 28 2021 - 17:47

GameStop’s shares were down 50 per cent by midday in New York on Thursday, in a sudden reversal as trading platforms placed restrictions on the stock after days of wild gains for small traders and huge losses for some of Wall Street’s most sophisticated investors.

Other stocks that had been bid up by the frenzy were also giving up ground. AMC Entertainment dropped 60 per cent, while American Airlines was up just 5 per cent after having started the day with a gain of more than 25 per cent.

The drop on Thursday came after Robinhood, a trading app that has made it easier for inexperienced traders to enter the market, said it had placed more restrictions on trades of those companies, limiting users to only selling shares they owned and buying shares they had shorted.

The run in GameStop this month – the stock had surged 1,700 per cent up to Wednesday, giving the company an astonishing market valuation of $24 billion (€19.8 billion) – means it has become detached from the factors that traditionally help establish a company’s value to investors, such as growth potential or profits.

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Feedback loop

The traders who had piled in were part of a frenzy that originated on a Reddit message board, WallStreetBets, a community known for irreverent market discussions, and on messaging platforms such as Discord. Egged on by the message boards, these traders had rushed to buy options contracts that will profit from a rise in the share price. That trading can create a feedback loop that drives the underlying share prices higher, as brokerage firms that sell the options have to buy shares as a hedge.

As more traders snapped up options, the brokers had to buy up more shares, driving the astounding rise in the company's stock prices. GameStop began the year at $19 a share and ended trading on Wednesday at nearly $348 a share. That spike has hit hedge funds that had been betting against the stock. Those funds have closed out the so-called short positions at sometimes big losses. It has also raised scrutiny of the trading platforms, with the Securities and Exchange Commission saying on Wednesday it was "actively monitoring" the volatile trading. – New York Times service

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