Amateur investors are responding with outrage after trading platforms curbed buying of shares within the US games firm GameStop and other companies.
The moves by Robinhood and Interactive Brokers follow days of frenzied trading that led to massive gains for a few stocks. Shares in GameStop dived by the maximum amount as 55% after the restrictions.
It is the newest twist during a battle that has pitted amateur investors against Wall Street giants. Major hedge funds had bet billions of dollars that GameStop’s shares would fall. But they need faced major losses after amateurs, swapping recommendations on social media sites like Reddit, drove up the share price by quite 700% during a week.
Other firms, like AMC Entertainment, Koss Corp and BlackBerry, also saw sharp gains. They were embraced by day traders after hedge funds bet against them. The activity has drawn questions from regulators, who are monitoring trading amid fears of illegal actions.
However, the amateur investors say they’re just playing Wall Street at its own game.
In online forums they accused Robinhood and other brokerages enacting their own sort of market manipulation by restricting purchases of certain shares.
“They support a capitalist free market only it works for them. What we saw today wasn’t a free market and it forced an awful lot of individuals to lose an awful lot of cash ,”
said 18-year-old Myron Sakkas of Coventry, a student at Warwick University.
Myron, who has had an account on the Trading 212 platform since August last year, said he had lost £30 on Gamestop shares, which he owned for “a few hours” and sold when he saw what was happening.
Myron said he had since been locked out of his account and unable to use it while his identity is being checked. But when he gains access again, he plans to take out the £1,000 he has in it and call a halt.
Though hoping to travel into investment banking after he gets his degree, he said he was disillusioned by what he sees as “market manipulation” directed against people like him.
“When ordinary people attempt to make money during a system where only rich traders can make money, that is what happens,” he told the BBC.
“Maybe I won’t trade for a while, to be honest,” he added. “I’ve got other stuff to do.”
Why have GameStop shares surged?
Key to what’s going on is “short selling” or “shorting”, where a big investment company such as a hedge fund tries to make money by betting that a company’s share price will fall.
The hedge fund borrows shares during a company from other investors (for a fee) and sells the shares on the markets at, for instance , $10 each, waits until they fall to $5, and buys them back. The borrowed shares are returned to the original owner, and the hedge fund pockets a profit.
GameStop – which saw heavy losses last year and was described as “failing” by one big investor – is the most shorted stock on Wall Street. Some 30% of its shares are thought to be in the hands of hedge fund borrowers.
But within the last week, amateur investors who follow the Wall Street Bets forum on Reddit have poured money into buying the company’s stock with the aim of pushing up the price.
If the price rises dramatically, short sellers face big losses and they need to buy back the shares they have borrowed quickly to prevent bigger losses – a process known as covering.
However, buying back the shares only adds to demand for the stock and pushes its price higher still.
‘Ordinary people getting rich’
In the US, anger over the trading restrictions united politicians whose stances typically sharply diverge.
Representative Alexandria Ocasio-Cortez, known for her leftist views, called the restrictions “unacceptable” and expressed support for a hearing, to which Sen Ted Cruz, a staunch Republican, replied, “Fully agree”.
Fully agree. 👇 https://t.co/rW38zfLYGh
— Ted Cruz (@tedcruz) January 28, 2021
Dave Portnoy, founder of the Barstool Sports blog, who has emerged as one of the most high-profile amateur traders during the pandemic, also attacked the restrictions, singling out Robinhood, which has cast itself as a platform aimed at making Wall Street more accessible.
The firm also makes money through fees paid by Wall Street firms that execute trades for its users.
“‘Democratizing finance for all’ except when we manipulate the market, cause too many ordinary people are getting rich,” he wrote.
And it turns out @RobinhoodApp is the biggest frauds of them all. “Democratizing finance for all” except when we manipulate the market cause too many ordinary people are getting rich pic.twitter.com/Xcvs4CdEmr
— Dave Portnoy (@stoolpresidente) January 28, 2021
Analyst Neil Wilson said that Reddit chat threads, suggest the day traders’ battle with Wall Street is personal.
“Among the many aspects of this story that are strange, what is so unusual is the peculiar vigilante morality of the traders pumping the stock. They seem hell-bent on taking on Wall Street, they seem to hate hedge funds and threads are peppered with insults about ‘boomer’ money.
“It’s a generational fight, redistributive and all about robbing the rich to give to the millennial ‘poor’.”
Amateur investing surge
The fracas follows a jump in casual investing during the pandemic, which saw people stuck at home with time on their hands and limited places to spend pour money into the market.
The surge has produced ripples of worry on Wall Street, including concerns that inexperienced investors could cause bubbles in certain stocks or dabbling in investments with risks they did not fully understand.
Robinhood – which has been one of the biggest beneficiaries of the new interest in investing – has faced particular scrutiny for the way its app has made investment seem like a game.
Last year, Massachusetts regulators filed a complaint accusing the company of marketing to inexperienced users and failing to protect them.
Officials said this week they were following the market battle.
Press secretary Jen Psaki said Wednesday President Joe Biden’s economic team, including newly-appointed Treasury Secretary Janet Yellen, was “monitoring the situation”.
Massachusetts state regulator William Galvin called on the New York Stock Exchange 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.”