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What you need to know about GameStop’s stock price chaos

What you need to know about GameStop's stock price chaos

What you need to know about GameStop's stock price chaos

By The Washington Post Time of article published 44m ago

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GameStop's improbable run has lifted its stock to meteoric heights – all propelled by ordinary investors, spurred by a Reddit message board, looking to show up the Wall Street funds that bet big money on the shares to fall.

The frenzied trading has catapulted the video game retailer's valuation to nearly $20 billion, a 14-fold increase from a month ago. Prices have risen so fast, and the drama over its stock trading has consumed so much attention, that members of the Biden administration and the U.S. Securities and Exchange Commission were compelled to say they were monitoring the situation.

Regular investors have openly rebelled against the deep-pocketed hedge funds that viewed GameStop as a mall-based dinosaur, destined to go the way of the record store.

They contend that a move away from physical stores and toward e-commerce, mobile gaming and streaming could reverse the company's spiraling financials. They also figured that if the stock price rose, all the giant funds that had brazenly bet against the company would get crushed by the weight of being wrong. This, they intuited, would trigger a cycle that would further elevate the company and enrich the everyday trader at the expense of the Wall Street establishment. Regular investors have made similar runs at AMC Entertainment, BlackBerry, Nokia and others.

Why is GameStop stock rising?

The start of GameStop's astonishing run can be traced to August 2020, when Ryan Cohen, the co-founder of the online pet supply company Chewy, disclosed that he held a major stake in the company. Armed with a record of success in e-commerce, Cohen is leading GameStop to de-emphasize its legacy stores and to focus instead on digital sales, esports and mobile gaming.

Earlier this month, GameStop named Cohen and two other former Chewy executives to its board, tasked with helping to transform the business into a digital empire. Shares nearly doubled the week after the announcement.

What is GameStop's 'short squeeze'?

People claiming to have purchased GameStop shares have framed their efforts as a collective, financial rebellion, delivering payback to giant Wall Street funds that placed reckless bets and have long exploited the financial system at the expense of the little person.

Part of GameStop's improbable rise is tied to the belief that its shares were predicted to fall. At the start of the year, GameStop was among the most highly targeted companies by short sellers – investors who bet against a company and stand to make money when its stock price falls. To short a company, a seller typically borrows a stock and then sells it, with the intention of buying the stock back later once the price drops. The seller then returns the shares to the entity from which it borrowed and pockets the difference in price.

But when pessimistic bets fail, and stock prices rise, short sellers still have to cover their borrowed shares. They are then forced to buy the stock back at the higher price. This is known as a "short squeeze." In this situation, short sellers try to cut their losses and buy shares that they expected to lose value. This money-losing squeeze can fuel a cycle of even higher prices, as short sellers purchase more shares and drive stocks even higher.

How are trading companies responding to the frenzy?

Interactive Brokers placed restrictions on GameStop trading, saying that long stock positions would require a 100% margin and short stock positions would require a 300% margin, indefinitely.

"We do not believe this situation will subside until the exchanges and regulators halt or put certain symbols into liquidation only," the firm said in a statement. "We will continue to monitor market conditions and may add or remove symbols as may be warranted."

Robinhood also took action to rein in GameStop, as well as other targeted companies like AMC, BlackBerry, Express, Koss, Nokia and Naked Brand Group.

Alexis Ohanian, Reddit's co-founder, said in a series of tweets Thursday that the frustration among ordinary investors like those who claim to have fueled the frenzied trading of GameStop dates back to the Great Recession.

Meanwhile, at least seven retail brokerage firms – including TD Ameritrade, Robinhood Crypto, E-Trade, Charles Schwab, Fidelity Investments, Vanguard and Interactive Brokers – experienced service disruptions Thursday morning, which many attributed to higher volume, though they did not specially cite the GameStop activity.

The website Downdetector reported log-in and website issues for some of the firms, as well as Reddit, starting after 9 a.m. Eastern time.

How are investors responding?

Some GameStop, AMC and other rally investors bought shares before they jumped on the WallStreetBets train, while others were members of the Reddit community long before the stock rally began. Many of them who use firms like Robinhood and Interactive Brokers to trade their shares woke up Thursday morning to volatile premarket trading, and, witnessing the sell-off, checked their own holdings and realized their accounts were restricted.

Massachusetts resident and Robinhood user Brendon Nelson filed a class action complaint against brokerage firm Robinhood, accusing the brokerage firm of blocking his access to his GameStop shares on Thursday in the U.S. District Court, Southern District of New York.

"Robinhood, in order to slow the growth of GME and deprived their customers of the ability to use their service, abruptly, purposefully, willfully, and knowingly pulled GME from their app," the complaint reads. "Upon information and belief, Robinhood's actions were done purposefully and knowingly to manipulate the market for the benefit of people and financial intuitions who were not Robinhood's customers."

The complaint alleges that Robinhood intentionally restricted trading to deprive investors of gains and manipulate the market, under claims of breach of contract, breach of implied covenant of good faith and fair dealing, negligence and breach of fiduciary duty. A Robinhood spokeswoman declined to comment.

Nelson, who is represented by Alexander Cabeceiras of Derek Smith Law Group in New York, called for a trial by jury. Cabeceiras did not immediately return a request for comment.

Frank Merentino, 40, a carpenter in New Jersey, sold all of his other holdings and bought 16 shares of GameStop's stock last week through Robinhood when he saw on the news that the stock was trending. He then joined the Reddit message board r/WallStreetBets to keep up with the saga.

On Thursday morning, Merentino said he watched the company's stock drop in premarket trading, he tried to buy more shares – but Robinhood cancelled the transaction, and flashed the message, "Order to sell has been confirmed at $140 per share." He tried to hit cancel, but the sale went through. He lost more than $2,000. He said the app took the money from his bank account but won't transfer the sale, so he's stuck and can't move to any other brokerage firms.

"I just got on this GameStop thing out of luck really, and now I got screwed," he said. "I'm not an expert of Wall Street stuff, but I know if I walked down the street and took something out of somebody's pocket, I know where I'd be."

When a close friend and WSB member told Joseph Maxfield, a freshman student at the University of Dayton in Ohio, about the GameStop rally, he jumped into the game. He bought shares in AMC, Naked and Nokia and watched them spike on the Robinhood app – until this morning. Within a half hour, the firm disallowed him from trading any short stocks or buy new ones, he said.

"I just don't understand, if you can sell, who's buying it? Because there's nobody to buy it," he said. "I would just like for somebody important or somebody powerful to look into it because it kind of seems like they cheated a lot of people out of money."


Original Article

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