Wall St vs Main St fight quashes hedge funds as GameStop extends rally

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Retail traders chalked one up versus Wall Street on Wednesday as hedge funds took heavy losses on short positions in GameStop, and regulators and financial professionals called for more scrutiny of trading fueled by anonymous social media posts.

In the latest skirmish in a week-long battle between Wall Street and Main Street, funds sold long positions in stocks to pay for losses shorting Gamestop, contributing to a slide of more than 2% in Wall Street’s main indexes.[.N]

“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,” technology investor Chamath Palihapitiya told CNBC. “The solution is more transparency on the institutional side, not less access for retail.”

The market turmoil caught the attention of the White House, with press secretary Jen Psaki saying President Joe Biden’s economic team – including Treasury Secretary Janet Yellen on her first full day on the job – was “monitoring the situation.”

Massachusetts state regulator William Galvin, called on NYSE to suspend GameStop for 30 days to allow a cooling-off period.

“This isn’t investing, this is gambling,” he said in an interview. “This is obviously contrived.”

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.

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The U.S. Securities and Exchange Commission said it was aware of the market volatility and working with fellow regulators to “assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants.”

Reddit has not been contacted by authorities over stock surges driven by a message board on the platform, a spokeswoman said.

The war began 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.

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 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.

WINNERS AND LOSERS

Shares of GameStop surged 135% on Wednesday, bringing their gain since Jan. 12 to about 1,700% and ballooning its market capitalization to $24 billion.

U.S. shares of BlackBerry Ltd jumped 33%, bringing their gain in 2021 to 279%, while movie theater operator AMC surged 300% and is now up over 800% year to date.

Along with Finnish technology firm Nokia Oyj, those companies were among the most heavily traded, with Reddit threads humming with chatter about the stocks. Nokia said it was not aware of any reason for the continuing surge in its share price.

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Such inflated stocks will eventually fall back to their fair value, predicted 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 Inc, 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 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 $10.6 billion as of Wednesday. In the last seven days the short has increased by $117 million, or 1.1%, as the stock price surged.

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.

“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.

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 bearish positions of influential funds.

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The 20 small-cap Russell 2000 index companies with the biggest bearish bets against them have risen 60% 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, however.

“That’s the sentiment, the public doing what they feel has been done to them by institutions,” Ohanian said in a tweet on Wednesday.

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