GameStop plunges after platforms place more restrictions on trading

GameStop began the year at $19 a share and ended trading Wednesday at nearly $348 a share
Last Updated 28 January 2021, 19:34 IST

GameStop’s shares were down as much as 50% by midday Thursday, in a sudden reversal as trading platforms placed restrictions on the stock after days of wild gains for small traders and huge losses for some of Wall Street’s most sophisticated investors.

Other stocks that had been bid up by the frenzy were also giving up ground. AMC Entertainment dropped 60%, while American Airlines was up just 5% after starting the day with a gain of more than 25%.

The drop Thursday came after Robinhood, the trading app that has made it easier for inexperienced traders to enter the market, said it had placed more restrictions on trades of those companies, limiting users to only selling shares they owned and buying shares they had shorted. Webull, another trading app, said customers would only be able to liquidate any positions they had in GameStop, AMC and Koss, a headphone manufacturer.

The run in GameStop this month — the stock had surged 1,700% through Wednesday, giving the company an astonishing market valuation of $24 billion — means it has become detached from the factors that traditionally help establish a company’s value to investors, like growth potential or profits.

The traders who piled in were part of a frenzy that originated on a Reddit message board, WallStreetBets, a community known for irreverent market discussions, and on messaging platforms like Discord.

Egged on by the message boards, these traders had rushed to buy options contracts that would profit from a rise in the share price. 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 snapped up options, the brokers had to buy up even more shares, driving the astounding rise in the company’s stock prices. GameStop began the year at $19 a share and ended trading Wednesday at nearly $348 a share.

That spike has hit hedge funds that had been betting against the stock. Those funds have closed out the so-called short positions at sometimes big losses. It has also raised scrutiny of the trading platforms, with the Securities and Exchange Commission saying Wednesday it is “actively monitoring” the volatile trading.

(Published 28 January 2021, 19:34 IST)

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