Billions at stake as GameStop buying blocked by brokers

Angry small-time traders and their perceived foes running Wall Street hedge funds have created and destroyed billions of dollars.

Picture: AFP

A pitched battle between an army of angry small-time traders in the US and their perceived foes running Wall Street hedge funds has created and destroyed billions of dollars this week, triggered at least one class action and led to calls for a federal investigation.

In a fight that has been brewing for months but broke out into the mainstream in recent days, hordes of traders, empowered by apps such as Robinhood and eToro that allow commission-free trades on US markets, have been pushing shares in moribund video game retailer GameStop ever higher.

The goal, articulated in often crude terms in online community Reddit’s WallStreetBets discussion forum, is to “squeeze” short-sellers of stocks in GameStop and other companies such as BlackBerry, and send them to the wall.

Short-sellers make money when stocks go down. But if the stocks rise, the losses can be theoretically uncapped.

GameStop, which like many retail businesses is struggling with the shift from bricks and mortar to online sales, has been a target of the hedge funds that employ short-selling strategies.

But, using a tactic which would not have been possible even a couple of years ago, the WallStreetBets community, which has grown just this week by more than 1.6 million to more than 5.6 million “Redditors”, has galvanised its members to buy — and as far as possible never sell — GameStop shares in order to, yes, make money, but also to destroy the Wall Street hedge funds many see as lacking legitimacy and being responsible for multifarious sins including triggering the Global Financial Crisis. Until midweek the momentum was surely on the side of the WallStreetBets traders, who pushed GameStop shares 134.8 per cent higher to $US347.51 in a single day.

The shares in the company, which reported a loss of $US18.8m in its most recent quarter, were changing hands for just $US4.21 a year ago.

Other US-listed companies to be caught up in the selling frenzy include cinema chain and shorts target AMC Entertainment, which was off 56.6 per cent after being bid up as much as 560 per cent over the past month.

Small Australian minerals company GME Resources — which shares the same trading code as GameStop — was also drawn into the frenzy, with its stock trading at 130 times the usual volume on Thursday.

This prompted a so-called “speeding ticket” from the ASX, where a company is asked to ­explain sharp share-price movements.

“GameStop which also has an exchange ticker code ‘GME’ but notes this company is not related in any way to GME Resources,” the Australian miner said on Friday.

Elsewhere, Australian stocks such as InvoCare and Unibail-Rodamco-Westfield have attracted the interest of short sellers, and Australian short sellers are supposedly getting nervous about where WallStreetBets’ attention will turn next.

But overnight on Thursday, something happened which took a situation where billions were already at stake, and elevated it to the next level.

Trading apps such as Robinhood — which claims its mission is to “democratise finance” — blocked buying of GameStop and a raft of other short targets.

GameStop shares fell precipitously, closing 44 per cent lower at $US193.60.

The WallStreetBets community erupted with fury, and were backed by several high-profile investors, politicians and thought leaders.

A class action led by the Rosen Law Firm has already been announced, and hugely influential figures such as Elon Musk revelled in anticipation of the coming fight.

The Tesla founder, himself the target of short sellers who believe his company’s stock is vastly inflated, tweeted his disdain, while pointing out the absurdity of being able to trade in stocks you don’t own, and bet on companies to fail.

“Here come the shorty apologists,’’ he tweeted.

“Give them no respect. Get Shorty.”

While Musk is not known for being measured in his opinions, others with perhaps more gravitas, such as the former labour secretary in the Clinton administration and Berkeley professor Robert Reich also weighed in.

“If Redditors rallying GameStop is unacceptable market manipulation, what would you call it when greedy Wall Street bankers gambled away our entire economy in 2008 and faced no consequences?

“When hedge fund billionaires move markets, they get huge bonuses.

“When ordinary Americans move markets, they get shut down by Wall Street.

“The system is rigged.’’

Robinhood’s actions drew the attention of firebrand US Democrat Alexandria Ocasio-Cortez, who has called for a House Financial Services Committee hearing on the issue.

With WallStreetBets calling on its members to stretch, hydrate and get ready for the next battle, it’s surely far from over.