As if to remind us that the social media revolution isn’t over, individual traders this week accelerated their efforts through message boards to push up prices of stocks that hedge funds had been betting against. This is a new type of disruption for the stock market.
Individual traders have banded together through Reddit’s WallStreetBets message board (where some users refer to themselves as “degenerates”) to purchase shares of heavily shorted stocks, which has led to a furious scramble among hedge funds and other short sellers to buy shares and cover their short positions. The feeding frenzy led to year-to-date gains of 1,582% for GameStop Corp. GME, +67.87%, 501% for AMC Entertainment Holdings Inc. AMC, +53.65% and 107% for Bed Bath Beyond Inc. BBBY, +5.02% as of 10 a.m. ET on Jan. 29, to name only three examples.
GameStop had short positions exceeding 100% of shares outstanding. But there is another way to gauge short interest — dollars. By that measure, Tesla Inc. TSLA, -5.02% was the most heavily shorted stock, with $60.9 billion in bets against the shares as of the close on Jan. 27, with $60.9 billion.
Brett Arends wrote an open letter to the novice traders who (hopefully) profited from the short squeeze in which he congratulates them but also reminds them that investing isn’t gambling.
Here’s more coverage of short squeezes:
- Short sellers down a net $54 billion on U.S. positions so far this year, data provider says
- It isn’t just GameStop: Here are some of the other heavily shorted stocks shooting higher
Robinhood’s big counter move and the reaction
On Jan. 28, Robinhood halted purchases of shares of GameStop, while continuing to allow clients to sell shares. The move was very unusual. It is normal for stock exchanges to suspend all trading of shares of a company if important news has completely disrupted trading. John Buckingham, the editor of the Prudent Speculator who has three decades’ experience managing money, said he had “never seen a situation” in which a broker had halted one side of trading.
Other brokerage firms restricted trading in GameStop, AMC and other stocks.
Robinhood reversed course and the GameStop buying spree resumed on Jan. 29. The unprecedented broad short-squeeze activity and trading restrictions and the reactions to it continue to unfold, so check back on MarketWatch for the latest developments.
More to consider amid short squeezes
Many novice investors have helped send shares of many previously out-of-favor stocks soaring. But even if you are an experienced investor, you probably don’t know all the new terms being bandied about.
William Watts explains why veteran professional investors are worried about the overall health of the stock market in light of the wild purchasing of heavily shorted stocks and related options trading.
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