Shares of GameStop tumbled 44% on Thursday after Robinhood and other stock-trading platforms halted trading for several hours.
The struggling video game retailer's stock has been makingin a drama that seemed to pit deep-pocketed Wall Street investors against a group of anonymous day traders posting on Reddit. The frenzy hit new heights Thursday when halted trading for GameStop, AMC Entertainment, BlackBerry and other stocks recently popular with retail investors.
GameStop shares were trading at $257 after hours, down significantly from an intraday high of $482. Shares of AMC Entertainment were at $10.90 after hours, a drop of one-third from intraday highs, while BlackBerry was trading at $16.50, a drop of about a quarter from its peak that day.
Meanwhile, the trading action has caught the attention of lawmakers in Washington, D.C. Democratic Senator Elizabeth Warren of Massachusetts has called for greater regulations of market rules, while Senators Sherrod Brown, a Democrat from Ohio, and Ted Cruz, a Republican from Texas, both condemned the trading platforms' move against indivdual investors as undemocratic.
The saga raises questions about whether a new generation of traders should be allowed to take full advantage of all the tools and free trades available in the markets, regardless of how reckless they may seem to outsiders.
What's happening with GameStop's stock?
It's been maniacal this month. After sitting around $18 three Fridays ago, the stock has doubled in four days. It kept shooting higher, before nearly doubling on Tuesday and then more than doubling again on Wednesday to $347.51. On Thursday, it gave back a chunk of those gains. But it's still up an amazing 1,250% through the first few weeks of 2021.
How is the company itself doing?
GameStop, based in Grapevine, Texas, is still struggling. It sells video games at more than 5,000 stores, and the pandemic has been keeping customers away. More worrisome is the long-term shift by customers away from brick-and-mortar stores and toward buying games online.
Enthusiasm has grown for GameStop's prospects after the company said earlier this month that a co-founder of Chewy, the online seller of pet supplies, was joining its board. Investors see Ryan Cohen helping GameStop's digital transformation. But analysts still expect GameStop to keep losing money in its next fiscal year. Many have price targets for GameStop at $15 or below.
How is Reddit involved?
Traders on Reddit, especially those in a group called Wallstreetbets, have recently rallied behind GameStop, encouraging each other to keep buying the stock and push itsnprice ever higher, or "to the moon." Their discussions are full of ideas for the next big trade to jump on, self deprecation and an appreciation of both winning and losing bets, as long as they're bold.
A major reason for GameStop's popularity in this forum was how deeply hated the stock was by hedge funds and other professional investors on Wall Street. Many were betting on GameStop's stock price to fall by "shorting" it.
What's a short?
It's how investors can make money off a stock falling. In a short sale, they borrow a share of GameStop and then sell it. Later, if the stock price does drop as they expect, they can buy the stock at a lower price and keep the difference. GameStop is one of the most heavily shorted stocks on Wall Street.
What's a short squeeze?
It's what happened with GameStop's stock. When a stock is very heavily shorted, a sustained rise in its price can force short sellers to get out of their bets. To do that, they have to buy the stock, which pushes the stock even higher and can create a feedback loop. As GameStop's short sellers have gotten squeezed this month, smaller and first-time investors have been egging each other on to to keep the momentum going.
Do these smaller investors believe in GameStop's business?
There's been a flavor of that in the discussions on the Wallstreetbets Reddit board. But lately the focus has been on inflicting pain on short sellers, hedge funds and other big financial firms. Many talk about it in terms of evening the ledger with the financial elite, who benefited from years of gains as other people fell further behind.
Buying GameStop "isn't about greed," one user wrote on Reddit, citing recessions caused by the financial sector and the times it's been bailed out with taxpayers' dollars. "It's about taking back what's ours, what we've already paid for."
"This is for making us work on Thanksgiving night all the way through black friday at 9.50 an hour," another user wrote.
What's the role of options and margin trading?
They're ways that investors can make a big profit with relatively small payments up front, if the stock moves in the right way. Many of the traders pushing up GameStop are smaller-pocketed or novice investors.
When they buy stocks "on margin," they're using borrowed money, which can supercharge their gains and losses. With options, an investor can buy the right to buy the stock at a later date at a certain price. If the stock hits that target, investors can reap a bigger return than if they simply bought a share. But if it doesn't, it can mean a total loss.
"The Redditors found a way to hack the system by generating more buying demand than their actual investments, but the underlying processes that drive this result are standard," Brad McMillan, chief investment officer for Commonwealth Financial Network, wrote in a blog post. "A group of small investors, using typical option markets, does not indicate to me that the system itself is broken."
What about the broader market?
Critics used to dismiss the moonshots for GameStop and others as a sideshow, saying the excess was confined to a few corners of the market. But Wednesday's broader-market tumble gives some caution. Sharp losses for short sellers may have pushed them to sell some of their other stock holdings to raise cash, and several investors say that forced selloff contributed to Wednesday's 2.6% slide for the S&P 500-stock index. It was the worst day for the U.S. market since October.
Did anyone see this coming?
Maybe not to this degree. But brokerages have been making it ever-easier for novices to get into the market and trade. Commissions have dropped to zero, and people can trade on their phones, with various bells and whistles on the apps that can make trading feel like gaming.
As each barrier to trading has fallen, consumer advocates cheered the broadening playing field. But they also warned it's possible to have too much of a good thing. Too-easy trading could encourage people to make too many trades that are too risky for them.
It may even encourage worse that that: Robinhood has been blamed for the suicide last year of a 20-year-old who mistakenly believed he lost $730,000 trading on the platform.
Can regulators do anything about this?
The U.S. Securities and Exchange Commission has said it's noticed all the volatility in the market and is taking a closer look. It's the SEC's job to protect investors, and the expectation across Wall Street is that investors holding GameStop at these lofty prices are likely to be hurt when its price falls.
What sets this case apart is all the communication going on between investors on Reddit, as they goad each other to push GameStop higher, said Chester Spatt, a former chief economist at the SEC and a finance professor at Carnegie Mellon University's Tepper School of Business. But he said it's difficult to declare it a clear case of market manipulation.
In the end, there may be no way to prevent people from pushing a stock too high and potentially burning themselves. Instead, Spatt said it may be better first to properly educate all these novice investors about the risks of stock bubbles and overzealous trading.
"A lot of people now feel like they're empowered, and they don't have to go through the traditional players" of Wall Street to invest, Spatt said. "And in fairness, they didn't do that great going through the traditional players."