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Gamestop: 'Failing' firm soars in value as amateurs buy stock | Gamestop: 'Failing' firm soars in value as amateurs buy stock |
(32 minutes later) | |
Shares in a US games company have soared more than 300% in the past week - the result of a fight between private and professional investors. | |
Video games bricks-and-mortar retailer Gamestop is arguably something of a relic in a world moving online. | |
But its shares soared another 116% in early Wednesday trading in New York. | |
Analysts blame tech-savvy young day traders, who they say are taking on hedge funds in a conflict with generational overtones. | |
It's a battle between Wall Street pros and upstart investors using social media platforms such as Reddit, they say. And at the moment, the upstarts have the upper hand. | |
It is, says Neil Wilson from markets.com, getting weird: "We are seeing some serious funny business in some corners of the market." | |
"Will it end badly?" asks Thomas Hayes, managing director at Great Hill Capital hedge fund. "Sure. We just don't know when." | "Will it end badly?" asks Thomas Hayes, managing director at Great Hill Capital hedge fund. "Sure. We just don't know when." |
What's driving up the Gamestop price? Certainly not any good news coming out of the company. Gamestop - described as a "failing mall-based retailer" by one professional investor - made a loss of $795m in 2019, and probably several hundred more in 2020. | What's driving up the Gamestop price? Certainly not any good news coming out of the company. Gamestop - described as a "failing mall-based retailer" by one professional investor - made a loss of $795m in 2019, and probably several hundred more in 2020. |
But that's not deterred an army of social media day traders, with access to free and low-cost trading platforms such as Robinhood, and who probably have a lot of time on their hands during lockdown. They've been swapping tips and ramping up prices via Reddit's chat thread wallstreetbets. | |
Gamestop is not the only stock in their sights - Blackberry, AMC and Nokia Oyjis are others - but is currently the battleground between the Goliaths like hedge funds and big investors, and the Davids who make up Reddit's private punters. | Gamestop is not the only stock in their sights - Blackberry, AMC and Nokia Oyjis are others - but is currently the battleground between the Goliaths like hedge funds and big investors, and the Davids who make up Reddit's private punters. |
Key to what's going on is "shorting", where, say, a hedge fund borrows shares in a company from other investors in the belief that the price of stock is going to fall. | Key to what's going on is "shorting", where, say, a hedge fund borrows shares in a company from other investors in the belief that the price of stock is going to fall. |
The hedge fund sells the shares on the markets at, for example, $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. | The hedge fund sells the shares on the markets at, for example, $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. |
That's the somewhat simplistic theory, anyway. | That's the somewhat simplistic theory, anyway. |
$2bn losses | $2bn losses |
Gamestop is the most shorted stock on Wall Street, with some 30% of the shares thought to be in the hands of hedge fund borrowers. But Reddit's retail investors have embarked on a frenzy of share buying and options trades - pushing up the price and putting a "short squeeze" on the pros. | Gamestop is the most shorted stock on Wall Street, with some 30% of the shares thought to be in the hands of hedge fund borrowers. But Reddit's retail investors have embarked on a frenzy of share buying and options trades - pushing up the price and putting a "short squeeze" on the pros. |
In this supercharged trading environment, the big Wall Street investors rush back into the market to limit their losses - with the demand pushing up the price still further. One hedge fund, Melvin Capital Management, reportedly had to be bailed out with more than $2bn to cover losses on some shares, including Gamestop. | In this supercharged trading environment, the big Wall Street investors rush back into the market to limit their losses - with the demand pushing up the price still further. One hedge fund, Melvin Capital Management, reportedly had to be bailed out with more than $2bn to cover losses on some shares, including Gamestop. |
For many Reddit investors, it's not just about making money. They smell blood. | For many Reddit investors, it's not just about making money. They smell blood. |
Analyst Neil Wilson says that from reading the Reddit chat threads, the day traders' battle with Wall Street is clearly personal. | Analyst Neil Wilson says that from reading the Reddit chat threads, the day traders' battle with Wall Street is clearly 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. | "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'." | "It's a generational fight, redistributive and all about robbing the rich to give to the millennial 'poor'." |
But many big investors are refusing to budge and continue to hold their Gamestop stock at rock-bottom prices. They believe the tide will turn on Reddit's herd instinct and Gamestop shares will come back to earth. | But many big investors are refusing to budge and continue to hold their Gamestop stock at rock-bottom prices. They believe the tide will turn on Reddit's herd instinct and Gamestop shares will come back to earth. |
"These are not normal times and while the [Reddit] thing is fascinating to watch, I can't help but think that this is unlikely to end well for someone," Deutsche Bank strategist Jim Reid said. | "These are not normal times and while the [Reddit] thing is fascinating to watch, I can't help but think that this is unlikely to end well for someone," Deutsche Bank strategist Jim Reid said. |
Tears and headaches | Tears and headaches |
For stock market veterans, it's an example of the madness of speculative trading that can only end in tears. And for regulators, it's a headache, as they are the ones who should be cracking down on market manipulation. | For stock market veterans, it's an example of the madness of speculative trading that can only end in tears. And for regulators, it's a headache, as they are the ones who should be cracking down on market manipulation. |
Jacob Frenkel, a former lawyer at the Securities and Exchange Commission, the main US financial regulator, said: "Such volatile trading fuelled by opinions where there appears to be little corporate activity to justify the price movement is exactly what SEC investigations are made of." | Jacob Frenkel, a former lawyer at the Securities and Exchange Commission, the main US financial regulator, said: "Such volatile trading fuelled by opinions where there appears to be little corporate activity to justify the price movement is exactly what SEC investigations are made of." |
However, other experts believe Reddit's legion of investors represent a generational shift in attitudes to money and use of new technology. | However, other experts believe Reddit's legion of investors represent a generational shift in attitudes to money and use of new technology. |
"I don't think this is a fad," said John Patrick Lee, a video game investment expert at VanEck. "A retail trader will not lean on Wall Street to manage their money and I definitely now see an antagonistic relationship between the old guard [Wall Street] and individual traders who are on the rise," he said. | "I don't think this is a fad," said John Patrick Lee, a video game investment expert at VanEck. "A retail trader will not lean on Wall Street to manage their money and I definitely now see an antagonistic relationship between the old guard [Wall Street] and individual traders who are on the rise," he said. |