So Wall Avenue believes that the GameStop commerce operated by Reddit is expiring
The war between hedge funds and retail investors over GameStop stock has a logical conclusion, according to executives and traders at a large Wall Street company.
Stocks of GameStop, the video game retailer, are up more than 900% year-to-date after members of a Reddit community called WallStreetBets banded together to propel the stock higher.
The campaign brought a share worth $ 19 at the start of the year to $ 482.85 on Thursday. Retail profits came at the expense of discerning investors like Melvin Capital and Citron Research, who were forced to close out their short positions when the stock rose in a so-called short squeeze.
At some point, it is said, GameStop’s shares will stop climbing, either because most shorts have given up and are no longer forced to buy the stock to cover losing positions, or because brokers, exchanges, or US market regulators somehow intervene .
This is where human nature kicks in: retail investors will watch their paper profits fade, and the natural impulse will be to sell, according to executives who have asked for anonymity to speak openly. Late attendees to the party will sell themselves out of fear, adding to a rush for exits and a decline in stocks, they added. The same forces that made the stock catapult rise higher will contribute to its rapid decline.
It is possible that early on we will get a sign of what the dissolving will look like. GameStop’s shares fell for the first time in six trading sessions on Thursday, falling 44% after Robinhood and Interactive Brokers curtailed activity on GameStop and a handful of other names.
However, there is no telling when a real unwind will take place or how long it will take. Shares rebounded strongly on Friday, rising another 80% to $ 332 per share in premarket trading after Robinhood reversed price and announced it would allow limited purchases of the stock.
Despite the billions of dollars in hedge fund costs, GameStop remains one of the worst-shortened stocks in the market, according to FactSet data. More than 120% of the available GameStop stock has been loaned, compared to about 140% at the beginning of the month.
“Usually a short squeeze ends in a big sell-off, but buyers wait, often those who cover shorts,” said CC Lagator, co-founder of Brokerage Options AI. “That can provide temporary support for a stock that is unwinding a brief press.”
If retail investors are burned in GameStop trading, the Securities and Exchange Commission will likely step in to prevent similar scenarios, according to another Wall Street source. Gary Gensler, President Joe Biden’s election as SEC chief has a reputation for being tough.
“The hedge funds are big boys, they know how the game is played,” said the banker, who spoke on condition of anonymity. “If the little guy gets hurt, Washington will get involved. We’re going to have an SEC leader who is a lot more active.”
Mini-bubbles in stocks like GameStop are just the latest sign of unusual activity in the markets since the coronavirus pandemic broke out, forcing central banks to unleash trillions of dollars in support of economies around the world.
At the beginning of the crisis, a collapse in demand led to negative oil prices for the first time in history. Equities and other asset classes rebounded rapidly thanks to central banks and have since reached record after record, resulting in staggering valuations despite high unemployment and rising death tolls. Bitcoin prices soared from around $ 6,000 at the start of the pandemic to $ 41,000 this month.
Now that millions of Redditors have free trading apps, full savings accounts and not much else to do, it is possible that there is a new playbook for quick wins in the stock market.
“Is this a new platform for investors to make decisions, is it even the playing field?” said Mark Williams, a Boston University finance professor and former Federal Reserve auditor. “You could argue that Reddit had the shorts checked and that’s positive.”
Robinhood’s attempt on Thursday to limit its users’ ability to offer GameStop and other businesses targeted by Reddit investors has been bipartisan criticized by lawmakers who claimed that the broker favors large institutional traders over small investors.
“I feel there is a double standard here,” said a former Goldman Sachs dealer who now works for a technology company. “If Goldman Sachs did this, it would be called ‘arbitrage’.”