Amateur investors are responding with outrage after trading platforms curbed buying of shares in the US games firm GameStop and other companies.
The moves by Robinhood and Interactive Brokers follow days of frenzied trading that led to massive gains for some stocks. Shares in GameStop dived by as much as 55% after the restrictions. It is the latest twist in a battle that has pitted amateur investors against Wall Street giants. Major hedge funds had bet billions of dollars that GameStop’s shares would fall. But they have faced major losses after amateurs, swapping tips on social media sites such as Reddit, drove up the share price by more than 700% in a week. Other firms, such as AMC Entertainment, Koss Corp, and BlackBerry, also saw sharp gains. They were embraced by day traders after hedge funds bet against them. The activity has drawn questions from regulators, who are monitoring trading amid fears of illegal actions.
However, the amateur investors say they are just playing Wall Street at its own game. In online forums, they discussed legal action and accused Robinhood and other brokerages of enacting their own form of market manipulation by restricting purchases of certain shares. Robinhood co-founder Vladimir Tenev tweeted that the firm had taken its decision based on regulatory requirements, and said limited buys of the restricted stocks would be allowed from Friday.
“They support a capitalist free market only when it works for them. What we saw today was not a free market and it forced an awful lot of people to lose an awful lot of money,” said 18-year-old Myron Sakkas of Coventry, a student at Warwick University. Myron, who has had an account on the Trading 212 platform since August last year, said he had lost £30 on Gamestop shares, which he owned for “a couple of hours” and sold when he saw what was happening. Myron said he had since been locked out of his account and unable to use it while his identity is being checked. But when he gains access again, he plans to take out the £1,000 he has in it and calls a halt. Though hoping to go into investment banking after he gets his degree, he said he was disillusioned by what he sees as “market manipulation” directed against people like him. “When ordinary people try to make money in a system where only rich traders can make money, that’s what happens,” he told the BBC. “Maybe I won’t trade for a while, to be honest,” he added. “I’ve got other stuff to do.”
Why have GameStop shares surged?
The key to what’s going on is “short selling” or “shorting”, where a big investment company such as a hedge fund tries to make money by betting that a company’s share price will fall. The hedge fund borrows shares in a company from other investors (for a fee) and 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. GameStop – which saw heavy losses last year and was described as “failing” by one big investor – is the most shorted stock on Wall Street. But in the last week, amateur investors who follow the Wall Street Bets forum on Reddit have poured money into buying the company’s stock with the aim of pushing up the price. If the price rises dramatically, short-sellers face big losses and they need to buy back the shares they have borrowed quickly to prevent bigger losses – a process known as covering. However, buying back the shares only adds to demand the stock and pushes its price higher still. And amateurs aren’t the only ones getting in on the action. This week, for example, private equity firm Silver Lake Group, which had loaned money to AMC Entertainment, converted its bonds to shares after the surge in the firm’s prices, a swap worth hundreds of millions of dollars.
‘Ordinary people getting rich’
In the US, anger over the trading restrictions united politicians whose stances typically sharply diverge. Senator Sherrod Brown, a Democrat who is taking over as chair of the banking committee, said he would hold a hearing about the “state of the stock market”. “People on Wall Street only care about the rules when they’re the ones getting hurt,” he said.