GameStop’s stock continues to soar

2021-01-28 03:27:01

NEW DELHI: Millions of amateur stock traders collectively are taking on some of Wall Street’s most sophisticated investors. They’ve piled into trades around companies that other investors had written off, pushing stock prices to stratospheric levels.
The main focus is GameStop, the troubled video game retailer. Its stock is up 1,600% so far this month, including Wednesday’s climb of 135%. AMC Entertainment was up 300% on Wednesday, and BlackBerry is up more than 250% this month.
The surging shares have become detached from the factors that traditionally help establish a company’s value to investors — like growth potential or profits. But the traders who are piling in probably aren’t thinking about those fundamentals.
Instead, they are part of a frenzy that appears to have originated on a Reddit message board, WallStreetBets, a community known for irreverent market discussions, and on messaging platforms like Discord. (One comment from WallStreetBets read, “PUT YOUR LIFTOFF DIAPERS ON ITS ABOUT TO START.”) Both Tesla’s Elon Musk and billionaire tech investor Chamath Palihapitiya have encouraged the crowd via Twitter.
Egged on by the message boards, these traders are rushing to buy options contracts that will profit from a rise in the share price. And 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 snap up options, the brokers have to buy up more shares, driving the astounding rise in the company’s stock prices. GameStop began the year at less than $19 and opened for trading Wednesday at more than $350, double the previous day’s close.
Another reason the shares are rising so quickly is that, until recently, they were heavily targeted by big investors who bet the stocks would decline by taking on short positions. As the shares surge, the shorters also have to buy the stock in order to cut their losses, and that triggers a so-called short squeeze — a sudden spike in a share’s value.
Gabe Plotkin, the hedge fund trader whose Melvin Capital was shorting GameStop, confirmed to CNBC on Wednesday that he had exited his position after having to raise a $2.75 billion bailout from Citadel and his former boss, Steve Cohen, amid the short squeeze. Plotkin’s other short bets appear to be suffering, possibly because they are being targeted by traders — Melvin and Plotkin are often pilloried on the message boards.
Jen Psaki, the White House press secretary, said Wednesday that the Biden administration’s economic team is “monitoring the situation” surrounding the volatile trading in some stocks.
Officials at the Securities and Exchange Commission and elsewhere are closely watching internet chat rooms for signs of potential market manipulation, although they can do only so much without clear signs of fraud. If a big group of traders simply decides to buy options on a stock at the same time, out in the open, proving malfeasance may be difficult.
GameStop is an US-based video game, consumer electronics, and gaming merchandise retailer. It was founded in 1984 by former Harvard Business School classmates James McCurry and Gary M Kusin.

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