GameStop mania has spilled over into a popular exchange-traded fund, as the WallStreetBets craze reaches beyond shares favored on social media.
The fund, State Street ’s SPDR S&P Retail ETF, was created in 2006 to give investors broad exposure to mall-store firms. Its shares have surged 23% this year, far outstripping a 4% gain in the S&P 500, despite the uncertain outlook for retail. Behind those gains are the traders who congregate on social-media platforms such as Reddit’s WallStreetBets forum and whose enthusiasm has turned this mundane investment into a roller coaster.
On Jan. 27, GameStop soared 135%, driven by events such as Tesla Inc. Chief Executive Elon Musk tweeting “Gamestonk.” The State Street fund jumped 42% the same day. The next day, GameStop shares tumbled 44% and the fund, known by its ticker XRT, dropped about 9%.
Activist short-sellers are different in the types of actions they advocate. These are people who are shorting the stock, and are arguing the current market value for the shares is too high. They may claim something is stinky about the financial reporting of results, and that regulators should audit the books. They may point out that management is engaged in some value-destroying activity that shareholders were unaware of. The activist shorts aren’t trying to destroy value — they claim that the true economic value was already much lower than the stock price would indicate, and that’s because the information the market has about the company is just plain wrong.
They’re being activists not because of altruism, obviously, but that the faster the market prices adjust to what they think the true value is, the less they’re exposed to the risk of getting squeezed out of their short position before they can profit.
Of course, if there’s one thing America’s national political class does not like or understand, it is lulz. Lulz are inherently chaotic and disorderly, and that tends to cause headaches for most anyone with a bureaucratic bent. But it also produces reactions like one we saw yesterday, in which Sen. Elizabeth Warren (D–Mass.) used the GameStop episode to call for intervention by the Securities and Exchange Commission (SEC).
It’s not at all clear what the SEC could do to stop what is essentially a financial market flash mob, aside from ensure that no large institutional investors are secretly in on the WallStreetBets side of the trade. If that’s the case (and it may well be, though who knows), then the SEC will probably end up taking some sort of action based on existing rules designed to prohibit fraudulent pump-and-dump schemes, where stocks are artificially boosted and sold off.
Silver futures surged as much as 13% to Monday, touching eight-year highs. That follows a 6% rally last week when some posts on the WallStreetBets group on Reddit called for betting on silver as a way to hurt big banks they believe are artificially suppressing prices.
Meanwhile, retail sites warned customers over the weekend they could not meet skyrocketing demand for silver bars and coins. The Commodity Futures Trading Commission said it is monitoring the silver markets and “remains vigilant in surveilling these markets for fraud and manipulation.” And “#silversqueeze” is trending on Twitter.
However, it’s not clear who the Reddit users are — nor whether their market moves match the claims online.
A number of Democrats and Republicans united in opposition this week to the strict limits imposed by Robinhood and other online stock brokerages on the purchasing of GameStop and other stocks swept up in a Reddit-fueled trading frenzy.
Disparate members of Congress like Alexandria Ocasio-Cortez, D-N.Y., Ro Khanna, D-Calif., Ted Lieu, D-Calif., Ken Buck, R-Colo., and Sens. Pat Toomey, R-Pa. and Ted Cruz, R-Texas, were among those who criticized the move, with many calling for hearings that Democratic leaders say will soon take place in both the House and Senate as what began as an internet movement continues to roil Wall Street.
Lawmakers trained attention on the volatility surrounding GameStop’s stock as several others this week. The stock climbed from $4 only a few months ago to more than $400 this week, juiced by an online movement not dissimilar to others that have broadly altered the political landscape in recent years. At the same time, hedge funds that made large bets on GameStop’s stock cratering — known as “shorting” — began to pile up big losses. Then the brokerages instituted limits, leading to charges of collusion with the larger financial entities facing big losses.
There’s just one problem: the billions of dollars in new “wealth” people have supposedly gained is mostly in the form of inflated GameStop stock. Before they can actually use that wealth, they need to convert it to cash. And if a lot of people start selling their shares, the stock will crash. Most of that GameStop “wealth” will evaporate, with many shareholders getting a fraction of the value they expected.
Meanwhile, if GameStop’s stock price starts to fall, short sellers will start to make money. Any short sellers who maintained their short positions through the bubble will make back most of what they lost.
Sooner or later, GameStop’s stock is going to return to normal levels. And when it does, we are likely to find that little wealth was actually transferred from wealthy hedge fund investors to the general public. Short losses as the stock appreciated will be largely balanced out by short gains as the stock falls. The gains of GameStop shareholders as the stock appreciates will be balanced by losses as the stock declines.
First, the digital distribution platform Discord banned the WallStreetBets account after the close Wednesday for “hate speech, glorifying violence, and spreading misinformation.” (For a moment, it looked like Reddit had also banned the group, but they resisted pressure to do so.) If the quoted justification sounds familiar, it’s nearly identical to the one given by Google, Apple, and Amazon for deplatforming Parler just three weeks earlier. Echoing Amazon, Discord said it had sent the group repeated warnings about objectionable content before deciding, on that day of all days, to shut them down.
Meanwhile, WallStreetBets investors were locked out of their trading accounts by online brokers such as Robinhood on Thursday morning. Based on new collateral requirements that it says were imposed by an industry consortium, Robinhood forbade its users from buying GameStop and other stocks that WallStreetBets had identified as short squeeze opportunities. Users were allowed only to “close their positions”—in other words, to sell to the shorts desperate to buy. When angry users registered their disapproval by leaving over 100,000 one-star reviews of the Robinhood app in the Google Play Store, Google deleted them.
Gamestop’s stock has been on a wild roller coaster ride, rising by roughly 640% from the start of last week to its peak. After Robinhood and other brokers initializing trading restrictions due to the heightened market activity, the stock has since fallen more than 80% to $90 per share.
But the stock’s volatile price action doesn’t come close to telling the story of how this market frenzy began on the Reddit community r/wallstreetbets, the hedge funds that suffered when GameStop share price rose dramatically, and why Robinhood halted trading last week.
Massachusetts’ top securities regulator, William Galvin, is looking into the actions of Keith Patrick Gill, the former MassMutual broker who played a key role in the trading frenzy surrounding video game retailer GameStop and other stock last week.
When people in the Reddit community r/WallStreetBets began pushing up GameStop’s share price, establishment investors started losing billions and billions of dollars. Since then, GameStop’s shares have been swinging wildly, going from about $17 at the start of the year to $483 last week and then to $90 by the close of Monday’s trading. Shares rose slightly on Tuesday to close at $92.41, which is still down more than 80% from their highs last week.
The only thing “dangerous” about a gang of Reddit investors blowing up hedge funds is that some of us reading about it might die of laughter. That bit about investigating this as a “pump and dump scheme” to push prices away from their “fundamental value” is particularly hilarious. What does the Washington Post think the entire stock market is, in the bailout age?
America’s banks just had maybe their best year ever, raking in $125 billion in underwriting fees at a time when the rest of the country is dealing with record unemployment, thanks entirely to massive Federal Reserve intervention that turned a crash into a boom. Who thinks the “fundamental value” of most stocks would be this high, absent the Fed’s Atlas-like support in the last year?
The Reddit-fueled frenzy in stocks such as GameStop Corp. and AMC Entertainment Holdings Inc. is prompting calls for regulators to reconsider a decades-old practice in the U.S. stock market: payment for order flow.
The practice, in which high-speed trading firms pay brokerages for the right to execute orders submitted by individual investors, has long been controversial. Some have said it warps the incentives of brokers and encourages them to maximize their revenue at the expense of customers. Supporters, including many brokers and trading firms, said it helps ensure investors get seamless executions and good prices on trades.
Last year, brokerages such as Charles Schwab Corp., TD Ameritrade, Robinhood Markets Inc. and E*Trade collected nearly $2.6 billion in payments for stock and option orders, according to JMP Securities. The biggest sources of the payments were electronic-trading firms such as Citadel Securities, Susquehanna International Group LLP and Virtu Financial Inc.
Payment for order flow helped set the stage for the manic trading in GameStop, whose shares began the year around $18, surged to a record close of $347.51 on Jan. 27 and ended Thursday’s session at $53.50. Other once-hot stocks such as AMC and Koss Corp. fell more than 20% on Thursday as the Reddit rally lost steam.