A slugfest between Wall Street and Main Street took an unexpected turn late on Wednesday after moderators of a stock trading forum that has helped fuel massive rallies in the shares of GameStop temporarily closed its doors.
Shares of GameStop and other companies tumbled in extended trading after WallStreetBets, a discussion forum popular with retail traders on the Reddit website, briefly turned invitation-only. They pared those losses around an hour later, when the forum opened back up.
"We have grown to the kind of size we only dreamed of in the time it takes to get a bad night's sleep. We've got so many comments and submissions that we can't possibly even read them all, let alone act on them as moderators," read a message from the group's moderators after WallStreetBets reopened.
Shares of GameStop, AMC Entertainment, Koss Corp and BlackBerry all dropped at least 20 percent moments after the shuttering of the forum, highlighting the role it has played in fueling stock rallies that many say have been driven primarily by retail investors.
Earlier in the day, amateur traders chalked one up versus Wall Street as hedge funds suffered heavy losses on short positions in GameStop, and regulators and financial professionals called for more scrutiny of trading fueled by anonymous social media posts.
In the latest skirmish in a week-long battle between Wall Street and Main Street, funds sold long positions in stocks to pay for losses shorting GameStop, contributing to a slide of more than 2 percent in Wall Street's main indexes.
"We are moving to a world where ordinary folk have the same access as professionals and can come to the same conclusion or maybe the opposite," technology investor Chamath Palihapitiya told CNBC. "The solution is more transparency on the institutional side, not less access for retail."
The market turmoil caught the attention of the White House, with press secretary Jen Psaki saying President Joe Biden's economic team - including Treasury Secretary Janet Yellen on her first full day on the job - was "monitoring the situation."
Massachusetts state regulator William Galvin called on NYSE to suspend GameStop for 30 days to allow a cooling-off period.
"This isn't investing, this is gambling," he said in an interview. "This is obviously contrived."
Nasdaq chief Adena Friedman said exchanges and regulators should watch whether anonymous social media posts could be driving "pump and dump" schemes.
"If we see a significant rise in the chatter on social media ... and we also match that up against unusual trading activity, we will potentially halt that stock to allow ourselves to investigate the situation," Friedman said on CNBC.
The US Securities and Exchange Commission said it was aware of the market volatility and working with fellow regulators to "assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants."
US Senator Elizabeth Warren, long critical of Wall Street, called on regulators to take action.
“For years, the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price,” Warren said on Twitter.
“It's long past time for the SEC and other financial regulators to wake up and do their jobs.”
Reddit has not been contacted by authorities over stock surges driven by a message board on the platform, a spokeswoman said.
The war began when famed short seller Andrew Left of Citron Capital bet against GameStop and was met with a barrage of retail traders betting the other way. Citron has been a target on WallStreetBets.
Left said in a video post that Citron abandoned its bet against GameStop after the video game retailer's value soared almost tenfold in a fortnight.
"I have respect for the market," Left said in the post.
Melvin Capital Management closed out its short position in GameStop on Tuesday after taking a huge loss.
Shares of GameStop surged 135 percent during Wednesday's trading session, bringing their gain since January 12 to about 1,700 percent and ballooning its market capitalisation to $24 billion (roughly Rs. 1,75,400 crores).
US shares of BlackBerry jumped 33 percent, bringing their gain in 2021 to 279 percent, while movie theater operator AMC surged 300 percent and is now up over 800 percent year to date.
Along with Finnish technology firm Nokia, those companies were among the most heavily traded, with Reddit threads humming with chatter about the stocks. Nokia said it was not aware of any reason for the continuing surge in its share price.
Such inflated stocks will eventually fall back to their fair value, predicted Ryan Detrick, senior market strategist at LPL Financial in Charlotte, North Carolina.
"It does have a David and Goliath feel, where the Reddit crowd is taking on the most shorted stocks by the largest hedge funds in the world and winning."
BlackRock, the world's largest asset manager, could have made gains of about $2.4 billion (roughly Rs. 17,540 crores) on its investment in GameStop. Its share holdings amounted to roughly a 13 percent stake as of December 31, 2020, a regulatory filing showed.
According to research firm S3 Partners, total short interest in GameStop was $10.6 billion (roughly Rs. 77,460 crores) as of Wednesday. In the last seven days the short has increased by $117 million (roughly Rs. 850 crores), or 1.1 percent, as the stock price surged.
Year-to-date, GameStop shorts have lost $19.15 billion (roughly Rs. 1,39,960 crores), including $9.85 billion (roughly Rs. 72,000 crores) on Wednesday at a $285 (roughly Rs. 20,800) share price, according to Ihor Dusaniwsky, S3's managing director of predictive analytics.
"These large mark-to-market losses will be squeezing many existing shorts out of their positions, but we are still seeing new short sellers taking their place as they look to short at the top and ride a windfall of profits," he said.
Long dismissed as "dumb money," retail traders have made stocks move in ways that defy fundamental analysis. Global bets worth billions of dollars could be at risk as amateurs challenge bearish positions of influential funds.
Experts are debating whether these massive share moves should be considered ominous signs for the market.
Reddit co-founder Alexis Ohanian said the rise of retail investors is healthy, however.
"That's the sentiment, the public doing what they feel has been done to them by institutions," Ohanian said in a tweet on Wednesday.
© Thomson Reuters 2021