PHILADELPHIA (KYW Newsradio) — A sharp rise in the share price of GameStop has trained the eyes of stock market watchers on a fast-growing Reddit discussion board called Wall Street Bets, where it appears that twenty-somethings armed with cheap and easy stock-trading apps like Robinhood and Trade Station are targeting stocks to soar and hedge funds for takedowns.
GameStop stock has rocketed from below $20 earlier this month to more than $400 early Thursday as a volunteer army of investors on social media challenged big institutions who had placed market bets that the stock would fall. The stock fell, however, to around $240 after sliding more than 30% in midday trading.
Bob Manning of Morgan Stanley Wealth Management says the normal short-selling market has been turned upside-down, and that what's making the markets go crazy.
"Now we all know about 'buy low, sell high.' You buy it for $5. You let it go up $10, and you take the profit. This is about shorting stocks, or selling it at $10, potentially buying it back at five and taking that profit," Manning said Thursday.
"Now that's been turned upside-down. The shorted stocks have been overrun by buyers. In other words, let's say you shorted it $10 a share, and it opened a 300. That has created enormous losses for the short sellers."
Manning says trading sites such as Robinhood have been encouraging retail investors to buy, which has created a "tsunami of gains" for them -- and an overwhelming amount of losses for the short sellers.
Now Robinhood and other online trading platforms are moving to restrict trading in GameStop and other stocks that have soared recently due to the rabid buying activity of these smaller-scale investors.
Shorting is common, but Manning says he's never seen it to this degree. The big organizations that have been caught short, and who are taking enormous losses, must sell in order to recover.
"The buyers need to sell it some time, and that takes discipline -- something absent in today's market," he said.
Robinhood said Thursday investors would only be able to sell their positions and not open new ones in some cases, and Robinhood will try to slow the amount of trading using borrowed money.
Besides GameStop, Robinhood said trading in stocks such as AMC Entertainment, Bed Bath & Beyond, Blackberry, Nokia, Express Inc., Koss Corp., American Airlines, Tootsie Roll, Trivago and Naked Brand Group would be affected by the new restrictions.
Interactive Brokers also placed option trading of AMC, BlackBerry, Express, GameStop and Koss "into liquidation," citing extraordinary volatility in the markets. It also tightened margin requirements indefinitely on "short stock positions."
"We do not believe this situation will subside until the exchanges and regulators halt or put certain symbols into liquidation only," the company tweeted.
The measures follow similar trading restrictions on Wednesday by Schwab and TD Ameritrade.
Some big institutions such as Citron Research and Melvin Capital had placed bets that GameStop shares would fall as the company tries to transform itself from a bricks and mortar retailer to a seller of online video games.
But smaller investors rallied to the stock. By sending the stock soaring higher, they forced the big players to cover their bets by buying the stock, increasing the stock even further.
One Montgomery County man, Vin Barrata, is one of the many investors caught up in the frenzy.
Barrata owns two shares of GameStop stock. The $8 investment he made early in 2020 had suddenly soared to more than $800 at one point this week, so he’s keeping a close eye on his portfolio.
“I’m a passenger in this crazy, crazy rocket that these guys are driving. They say they’re riding this all the way to the end,” he said.
For now, he says he’s going to hold and wait for an opportune time to sell his two shares.
Robinhood's stated goal is to "democratize" investing and to bring more regular people into investing. But the company has run afoul of regulators who say the company downplays the risks of trading. Robinhood says it is making moves to better educate users of its platform about those risks.
The White House says it's watching stock market activity around GameStop and other heavily shorted companies. The Securities and Exchange Commission says it is actively monitoring volatility in options and equities markets.