NEW YORK: Retail traders scored against professionals on Wednesday (Jan 27) as hedge funds Citron and Melvin retreated with heavy losses on short positions in GameStop in the week-long battle between Wall Street and Main Street, with more calling for scrutiny of anonymous stock trading posts on social media.
Funds sold long positions in stocks to pay for the losses, which sparked a 1 per cent slide in Wall Street's main indexes.
The battle started 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. The short squeeze has been so sharp that funds were selling long positions in stocks to pay for the losses.
"Because the rules are changing, people don't like that," technology investor Chamath Palihapitiya told CNBC. "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. The solution is more transparency on the institutional side not less access for retail."
Citron has been a target for some on Reddit's "WallStreetbets" thread, where posts helped drive gains for several niche stocks. Left said in a video post that Citron abandoned its bet against GameStop shares 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.
The Goldman Hedge Industry VIP ETF, which tracks hedge funds' most popular stocks, has fallen for five straight sessions, its longest losing streak since February 2020.
Commentators and lawyers called for scrutiny of the moves. 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.
Friedman added that exchanges and regulators should investigate if they suspect "that there may be some manipulation".
The US Securities and Exchange Commission (SEC) declined to comment. GameStop and AMC are both listed on the New York Stock Exchange.
The White House and US Treasury Department are monitoring the situation, White House Press Secretary Jen Psaki said. Reddit has not been contacted by authorities over stock surges driven by a message board on the platform, a spokeswoman said.
Commentators have questioned moves in several Reddit-hyped stocks. Some on Wall Street wonder share prices across the market have soared into bubble territory.
GameStop's stock has surged nearly 700 per cent in two weeks, lifting the struggling retailer's market value from US$1.24 billion to more than US$10 billion. BlackBerry soared 185 per cent on Tuesday, on course for its biggest monthly gain ever.
GameStop surged another 113 per cent to US$316.08 on Wednesday and AMC's stock was up 285 per cent to US$19.07, while the broader stock market fell 1.7 per cent. TD Ameritrade limited trading in GameStop and others, CNBC reported.
Along with Finnish technology firm Nokia, the companies were among the most heavily traded, with Reddit threads humming with chatter about the stocks. Nokia said on Wednesday it was not aware of any reason for the continuing surge in its share price.
Such inflated stocks will eventually come back to their fair value, said 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 US$2.4 billion on its investment in GameStop. Its share holdings amounted to roughly a 13 per cent stake as of Dec 31, 2020, a regulatory filing showed.
"It's a dangerous game to play from both sides of the spectrum, whether you're long or short," said Matthew Keator, managing partner in wealth management firm the Keator Group in Lenox, Massachusetts.
"You get close enough to the fire you're going to get burned ... it won't matter what social media is cheering the stock on."
According to research firm S3 Partners, total short interest in GameStop was US$10.6 billion as of Wednesday. In the last seven days the short has increased by US$117 million, or 1.1 per cent, as the stock price surged.
Year-to-date, GameStop shorts have lost US$19.15 billion, including $9.85 billion on Wednesday at a US$285 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.
REVENGE OF 'DUMB MONEY'
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 the bearish positions of influential funds.
On GameStop, the retail investor army has gone toe-to-toe with institutional short-sellers, a traditional area for hedge funds.
The 20 small-cap Russell 2000 index companies with the biggest bearish bets against them have risen 60 per cent on average so far this year, easily outperforming the market, a Reuters analysis of Refinitiv data shows.
Europe's most-shorted stocks also saw big price swings on Wednesday. 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.
"That's the sentiment, the public doing what they feel has been done to them by institutions," Ohanian said in a tweet on Wednesday. "I know they're all 'random people on the internet' but there's a lot more empathy and community there than people realise."