GameStop saga squeezes stock gains of the rich

Individual-institution standoff is somewhat reminiscent of the 2008 great recession

The stock market frenzy over GameStop cooled on Monday, with the video game retailer's shares dropping more than 30 percent, as the action shifted to the silver market.

An effort to drive up the price of silver succeeded on Monday, but it was much more muted than the GameStop activity, namely because the price of commodities is more difficult to manipulate.

Last week, the showdown over GameStop shaped up as the latest installment of Wall Street vs Main Street, a story that reverberated around the globe.

Retail investors snapped up shares of the ailing GameStop and a handful of other stocks-including movie theater operator AMC Entertainment Holdings, majority owned by the Dalian Wanda Group-to antagonize Wall Street hedge funds that "short" the shares, or betting against the stock. Short selling is a stock market practice in which someone borrows a stock from a holder and then sells it with the expectation that the stock's price will fall.

Stocks are usually valued on their fundamentals, but GameStop does not have good fundamentals, which is why the Wall Street bet that its stock would decline. However, fundamentals have been cast aside in this vengeful trading battle.

GameStop shares plummeted by 30.8 percent to $225 on Monday, but other stocks caught up in the long-vs-short action continued to rise, including BlackBerry.

The army of individual investors that have routed the professionals were slowed down last week after online brokerages Robinhood Markets and Interactive Brokers restricted trading in GameStop, AMC, American Airlines, Nokia and BlackBerry.

"We think congressional attention to these issues is appropriate," said White House Press Secretary Jen Psaki on Monday.

Vlad Tenev, CEO of Robinhood, is expected to testify before a House of Representatives committee on Feb 18 in the United States. Robinhood outraged investors on its free trading platform last week by limiting the purchase of certain stocks to sales only.

A social media driven buying spree lifted silver to an eight-year high on Monday, but the rally did not ease doubts about the ability of retail traders, who are normally focused on stocks, to move prices in a larger, more liquid commodities market.

"Unlike single stocks, the market for silver is much larger and more complex and therefore more difficult to manipulate," said Raffi Boyadjian, senior investment analyst at XM.

Retail investors on the Reddit online forum WallStreetBets expressed concern on Monday that bets on silver were undercutting their focus. The forum was a driving force in the GameStop action.

The silver rush began on Thursday after posts on WallStreetBets urged investors to buy physical silver.

Global short interest in silver, or the cumulative value of bets that its price falls, is equivalent to about 900 million ounces-just short of annual global production.

Recession deja vu

The individual-versus-institution standoff is somewhat reminiscent of the great recession of 2008, when several big Wall Street banks made bad bets on mortgage-backed securities. That crash led to the collapse of some established Wall Street firms such as Bear Stearns and Lehman Brothers.

With more people at home with more time on their hands during the COVID-19 pandemic, some have taken to day trading stocks. The pandemic has also created additional disposable income for some, and a combination of fiscal stimulus and loose monetary policy has pumped up liquidity.

Jim Collins, CEO of Excelsior Capital Partners in New York, blamed the easy money policies of the Federal Reserve, the Treasury and now Robinhood.

He said the action in GameStop among others "is even more evidence that the markets are easily manipulated".

The growth of apps like Robinhood has brought zero-cost trading to the cooped-up masses.

"I didn't realize it was this cultlike," said short-seller Andrew Left of Citron Research to the Journal. "It's just a get-rich-quick scheme."

The showdown began last week when Left's short bet against GameStop was met with a barrage of retail traders betting the other way.

"The unfortunate events in GameStop… may be building a dangerous precedent for markets whereby retail investors act en masse to leverage their buying powers to spark fragility events," wrote analysts at JP Morgan in a note.

But not everyone sees it that way.

"Robin Hood: a parable about stealing from the rich to give to the poor. Robinhood: an app about protecting the rich from being short squeezed by the poor," wrote Jake Chervinsky, a lawyer for fintech company Compound, in a tweet.

"We're done letting hedge fund billionaires treat the stock market like their personal playground, then taking their ball home as soon as they lose," said Representative Ro Khanna, a Democrat from California.

Billionaire entrepreneur Mark Cuban touted the WallStreetBets success as a counterweight to high-speed trading firms that have technological advantages against individuals.

UBS data showed the pack of retail traders, some of them former bankers working for themselves, have become an increasingly powerful force worth 20 percent of equity orders last year.

Reuters contributed to this story.