Shares in the GameStop video game company at the centre of small investors’ gathering assault on Wall Street have plunged 60%, after the amateur trading platform Robinhood barred users from investing in stocks including GameStop’s.
Pre-market trading had suggested prices would dip, after the stock more than doubled in value on Wednesday. But shares in GameStop defied predictions initially, with an early surge taking the market value of the company beyond $30bn (£22bn), nearly 100 times what it was worth in August last year.
But after Robinhood, a key conduit for small investors, barred investors from buying any more shares in eight companies including GameStop on Thursday, the meteoric rise fizzled out, leading to big falls as the day went on.
GameStop was down more than 60% by lunchtime on Wall Street, while the share prices of other companies caught up in the affair, such as Nokia, BlackBerry and AMC, also suffered big falls. All four companies are among a small group that have soared in value due to a phenomenon that began on the web forum Reddit, where users took aim at hedge funds making big bets against GameStop.
As amateur investors piled into stocks that hedge funds had tipped to struggle or fail, the resulting rise in their share prices has left big Wall Street institutions sitting on losses of more than $1bn, according to reports on Thursday.
Many traders participating in the buying spree have used platforms such as Robinhood, which claims to “democratise” finance by letting ordinary people trade shares and more complex financial instruments such as options.
Robinhood and its rival Trading 212 banned further investment in GameStop, as well as other targets of the Reddit group WallStreetBets.
Robinhood, which faced criticism after a young trader killed himself in the belief that he had lost more money than he actually had, cancelled its UK launch last year. The company has not responded to a request for comment.
Such is the concern about the potential effect on stock markets that the White House and financial regulators have said they are monitoring the situation.
A spokesperson for the UK’s Financial Conduct Authority said: “The FCA is aware of the situation and continues to closely monitor trading in UK markets. UK investors should take care when trading shares in highly volatile market conditions that they fully understand the risks they are taking. This applies to UK investors trading both US and UK stocks.
“Firms and individuals should also ensure they are familiar with, and abiding by, all regulations including the market abuse and short selling regimes in the jurisdiction they are trading in.”
The phenomenon has been fuelled by small investors not just buying shares but also trading in options, a sort of leveraged bet that allows them to invest at a low upfront cost, increasing the power of small investors’ bets.
The result is that hedge funds such as Melvin Capital that bet against GameStop and other companies are caught in a “short squeeze”. The more the shares go up, the bigger the losses they face. They also have to “cover” their position – in effect betting on a continued increase in the share price to offset the losses on their previous bets against it.
This has fuelled the upwards trajectory of the shares, trapping them in a potentially costly short squeeze.