(ATF) Retail traders who take a cue from Reddit’s “Wallstreetbets” thread made further gains against short-selling hedge funds Citron and Melvin on Wednesday January 27, but US regulators may clamp down on trading posts on social media.
The success of this week’s retail assault on short positions in GameStop has prompted hedge funds to cut similar positions around the world and sell long positions in stocks to pay for their losses, which contributed to a slide of over 2% in Wall Street’s main indices on Wednesday.
The battle started when short seller Andrew Left of Citron Capital bet against GameStop and was met with a barrage of retail traders betting the other way.
Left was previously best known for his short positions and reports attacking Chinese companies including property group Evergrande.
Hong Kong authorities in 2016 fined Left and banned him for five years for publishing misleading claims about Evergrande, although the firm’s subsequent troubles have partially vindicated his concerns about its health.
The current squeeze on holders of short positions by retail investors is putting institutional sellers in an awkward position. The slump into huge losses by Melvin Capital has alarmed other short-selling hedge funds and led to spikes in European companies including Nokia and Pearson that had been shorted, as well as US names.
Asian stocks next?
The trend could spread to Asian names that have recently seen short selling, such as Malaysia’s Top Glove, or larger liquid stocks such as Alibaba.
Investors are divided over how to react to the waves of retail buying, which seem to have little connection to fundamental prospects for companies such as GameStop.
“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 was a target 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.
Call for scrutiny of social media posts
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 Securities and Exchange Commission (SEC) said it was “actively monitoring” unusual trading.
The White House and US Treasury Department are also 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.
Huge stock surge
GameStop’s stock has surged nearly 700% in two weeks, lifting the struggling retailer’s market value from $1.24 billion to more than $10 billion. BlackBerry soared 185% on Tuesday, on course for its biggest monthly gain ever.
GameStop surged another 113% to $316.08 on Wednesday and AMC's stock was up 285% to $19.07, while the broader S&P index fell 2.5%.
BlackRock, the world’s largest asset manager, could have made gains of about $2.4 billion on its investment in GameStop. Its share holdings amounted to roughly a 13% stake at the end of 2020, a regulatory filing showed.
In the year-to-date, GameStop shorts have lost $19.15 billion, including $9.85 billion on Wednesday at a $285 share price, according to Ihor Dusaniwsky, S3’s managing director of predictive analytics.