The price jumps were so dramatic that trading for both companies was temporarily halted by the stock exchanges in an automated effort to temper volatility. But once trading resumed, the stocks’ prices took off again. TD Ameritrade, a leading trading platform, took the unusual step of putting restrictions on trading in the companies’ stocks, citing “an abundance of caution amid unprecedented market conditions.”
The inexplicable rise in AMC and GameStop’s stock prices has become one of Wall Street’s most-watched dramas, pitting an apparent army of retail investors against seasoned Wall Street traders. Some of the Reddit participants, who had organized in the message board WallStreetBets, claimed they were punishing Wall Street and “democratizing” trading. However, the forum does not require members to identify themselves or verify their trades, making it vulnerable to savvy traders.
For weeks, users posting onWallStreetBets have been rallying support for GameStop, which has been targeted by short sellers as it struggles to adapt its brick-and-mortar business. The apparent group of retail investors began betting that the company’s stock price would rise, challenging Wall Street short sellers wagering the opposite. As the stock prices rose, the Wall Street traders have been forced to take massive losses.
Among those that appeared to be cheering on the Reddit crowd was Elon Musk, the chief executive of Tesla, who said “Gamestonk!!” on Twitter with a link to the message board. (Musk has waged his own battles against short sellers, saying in 2018 that “what they do should be illegal.”)
“GameStop has become a pyramid scheme,” said Michael Pachter, an analyst with Wedbush Securities. Investors buying the stock at $200 are convinced someone else will buy it from them at $250, he said. But that won’t last forever, he said.
“Pyramid schemes work as long as new investors believe there will be new investors behind them; when it’s clear nobody else is going to come in, they are less likely to participate.”
Over the last week, the Reddit board has started putting its support behind AMC, which recently announced it raised nearly $1 billion to avoid bankruptcy, and its stock price has also jumped.
On the forum, participants who claimed to be ordinary investors celebrated their collective efforts to take down big hedge funds. This week, Melvin Capital, a large hedge fund, needed a $2.75 billion investment after it lost a fortune betting that Gamestop’s stock would fall. Instead, purportedly due to the collective trading of the Reddit forum, the share price soared 400 percent this week.
The Securities and Exchange Commission did not immediately respond to a request for comment and has not yet released a public statement on the matter. The agency is undergoing a leadership change.
The frenzy comes amid an overall decline in stocks, with the Dow Jones industrial average falling more than 400 points at Wednesday’s market open, as investors sorted through a mixed bag of corporate earnings and awaited afternoon news from Federal Reserve Chair Jerome H. Powell. Shortly before 10 a.m., the blue-chip index dipped 560 points, down 1.8 percent. The broader S&P 500 dropped nearly 80 points, or 2 percent, while the tech-heavy Nasdaq 100 shed about 308 points, or 2.2 percent.
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