Millions of amateur stock traders collectively take on some of Wall Street’s most discerning investors. They have piled up in deals with companies that other investors had written off and brought stock prices to stratospheric levels.
The main focus is on GameStop, the troubled video game retailer. The stock is up 1,700 percent this month, including Wednesday’s 135 percent gain. AMC Entertainment rose 300 percent on Wednesday and BlackBerry rose more than 275 percent this month.
Soaring stocks have broken away from the factors that traditionally help determine a company’s value to investors – such as growth potential or earnings. But the traders that pile up likely don’t think about these basics.
Instead, they’re part of a frenzy that apparently sprang up on a Reddit message board, WallStreetBets, a community known for disrespectful market discussions, and messaging platforms like Discord. (One comment from WallStreetBets read, “Put your LIFTOFF diapers on.”) Both Tesla’s Elon Musk and billionaire tech investor Chamath Palihapitiya have encouraged the crowd on Twitter.
Encouraged by the message boards, these traders are rushing to buy options contracts that will benefit from a surge in the stock price. And that trading can create a feedback loop that drives up underlying stock prices as brokerage firms selling the options have to buy stocks as a hedge.
As more traders purchase options, brokers have to buy more stocks, which is driving the staggering surge in the company’s stock prices. GameStop started the year at $ 19 and ended trading at nearly $ 348 on Wednesday.
Another reason stocks are rising so fast is because, until recently, they have been heavily targeted by large investors who bet that stocks would fall by taking short positions. As stocks rise, shorters must also buy the stock to reduce their losses, and this triggers what is known as a short squeeze – a sudden surge in the value of the stock.
Gabe Plotkin, the hedge fund trader whose Melvin Capital short-sold GameStop, confirmed to CNBC on Wednesday that he left his position after he launched a $ 2.75 billion bailout from Citadel and former boss Steve Cohen in the had taken a short time. Mr. Plotkin’s other short bets seem to be suffering, possibly because they are being targeted by dealers – Melvin and Mr. Plotkin are often denounced on message boards.
Jen Psaki, White House press secretary, said Wednesday that the Biden administration’s economic team is “monitoring” the situation related to volatile trading in some stocks.
Officials from the Securities and Exchange Commission and elsewhere closely monitor internet chat rooms for signs of possible market manipulation, when there is only so much they can do without clear evidence of fraud. When a large group of traders simply chooses to simultaneously buy options on a stock outdoors, it can be difficult to prove wrongdoing.