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Jan 29, 2021

GameStop rally reignites as retail traders step back in

Reddit-driven investing likely the beginning of a permanent trend: Aventine's James Telfser

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GameStop Corp. advanced on Friday and was on track to recoup much of Thursday’s US$11 billion blow after Robinhood Markets Inc. and other brokerages eased trading restrictions on the video-game retailer.

The shares at the center of the retail craze that’s gripped Wall Street and drawn scrutiny from Washington, rose 67 per cent to US$330 at 12:50 p.m, after earlier climbing as much as 114 per cent. in New York. The stock plunged a record 44 per cent on Thursday. Shares in other day-trader favorites also rebounded.

GameStop’s rally was reignited by Robinhood’s decision to lift some curbs that prevented investors from buying shares that had been going straight up for days. Worth less than US$5 billion just a week ago, the stock has been propelled by day traders using Reddit forums to take on the Wall Street establishment.

At one point, GameStop briefly became the largest member of the Russell 2000 Index after hitting a peak value of US$33.7 billion Thursday.

“The trading restrictions helped a bit but the rules will need to be refined such that it does not just restrict one class (i.e. retail) of investors,” said Amy Kong, chief investment officer of Barrett Asset Management. “At some point, like a house of cards, this will prove unsustainable.”

Citron Capital’s Andrew Left, one of the short sellers who has faced a reckoning in the battle with the growing groups on Reddit’s WallStreetBets forum, said the firm will discontinue offering short-sell analysis after 20 years of providing the service. Left said on Wednesday his firm closed out of a GameStop short bet in “the US$90’s at a loss of 100 per cent.”

AMC Entertainment Holdings Inc. rose 60 per cent after falling 57 per cent on Thursday and Koss Corp. added 79 per cent after sliding 28 per cent in the previous session. AMC has more than tripled in size this week with its market value ballooning to US$5.8 billion while Koss shares are on pace to cap roughly a 2,000 per cent surge this week.

Limited Action

The U.S. Securities and Exchange Commission said it’s looking at potential misconduct and will review decisions by brokerages to curtail buying of some stocks.

Robinhood said clients would be able to make limited purchases of some of the companies that it blocked, but did not provide further details. Morgan Stanley’s E*Trade said it expects to resume normal trading operations Friday, while Trading 212, another app, said it enabled trading of GameStop and AMC, two of the stocks whose meteoric gains have delivered massive losses to some prominent hedge funds that held large short positions in them.

Robinhood’s decision Thursday to rein in the risk to itself by banning certain trades and unwinding client bets -- igniting an outcry from customers and even U.S. political leaders -- came after the stock market’s central clearing hub demanded large sums of collateral from brokerages that for weeks had facilitated spectacular jumps in shares such as GameStop. The trading platform also said it was raising an emergency infusion of more than US$1 billion from its existing investors.

The move by the brokerages sent this month’s retail favorites tumbling Thursday, though their rebound sets up another rough patch for the Wall Street establishment that has been under pressure from Reddit-charged day traders.

The prospect of continued volatility driven by retail-trader speculation weighed on stock prices Friday, with the S&P 500 Index falling more than 2 per cent. The index is on pace for its worst weekly performance since the end of October.

“Doubling from US$30 to US$60 is relatively easy compared to going from US$300 to US$600,” Dan Egan, managing director of behavioral finance and investing for robo-adviser Betterment LLC, said by phone. “So it’s going to be hard for any one individual stock to stay in the collective attention unless it keeps doing really outrageous things. Otherwise we’ll probably move onto other ones.”