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A Reddit community WallStreetBets has taken the hedge-funds on a ride by pumping stocks that were heavily shorted by these funds. The Biden administration and the SEC is closely observing this situation around GameStop.
The GameStop Corp (NYSE: GME) stock surge has totally baffled Wall Street investors as GME stock has gained 8.8x in just the last four trading sessions. An active trading community “WallStreetBets” on Reddit dominated by retail players is reportedly behind this stock pump.
The ongoing campaign of heavy short squeeze has caused the stock price to rally at an unprecedented rate. As of Wednesday closing, GME stock was trading at $347 taking the company valuations to a massive 24.24 billion. Looking at this chaotic price surge, Wall Street brokers and financial service providers have threatened to cut off the trading access to “limit risks”.
TD Ameritrade restricted trading for the GameStop stock citing “unprecedented volumes”. The platform called this move in the “interest of mitigating risks for our company and clients”.
Please be aware that unprecedented volumes today may be causing limited access to the TD Ameritrade Mobile app. Please consider using our website or other platforms.
— TD Ameritrade (@TDAmeritrade) January 27, 2021
As per the Bloomberg report, even Wells Fargo banned its advisors from recommending GameStop and AMC Entertainment. The matter has now reached the White House and the Biden Administration is closely watching the complete situation. White House Press Secretary Jen Psaki told reported about the same on Wednesday afternoon. Also, in a brief statement, the securities regulator SEC noted:
“We are aware of and actively monitoring the on-going market volatility in the options and equities markets and, consistent with our mission to protect investors and maintain fair, orderly, and efficient markets, we are working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants”.
Retails Traders Taking Hedge Funds for a Ride
Retails traders from the ‘Wall Street Bets’ Reddit community has talked hedge funds on a ride with the recent mayhem caused in the market. Interestingly, the community members have been heavily pumping stocks that hedge funds have shorted. Thus, it has caused a major nightmare for hedge funds who had to call off their short positions.
For e.g. Melvin Capital was holding a huge short position on GameStop. Well, with the recent price boom, Melvin Capital also had to incur huge financial losses. The fund finally decided to catapult and ultimately close its position on Tuesday, January 26. There were reports of Melvin Capital filing for bankruptcy, however, CNBC has confirmed that they were false.
GameStop (GME) is not the only share that the Reddit community has pumped. Heavily shorted stocks like BlackBerry Ltd (NYSE: BB) and AMC Entertainment (NYSE: AMC) have registered triple-digit % gains in the last few weeks. Reportedly, WBS traders had set their eyes on these companies. Also, Eastman Kodak company (NYSE: KODK) surged a whopping 28% on Wednesday closing at $12.08.
Tootsie Roll Industries Inc (NYSE: TR) and National Beverage Corp (NASDAQ: FIZZ) are also the most-shorted stock by hedge funds. Thus, we could possibly see some price action driven by WBS traders looking at the ongoing market activity.
Expert Views on Recent Events Related to GameStop (GME) Stock
Speaking to Bloomberg, James Cox, a professor at Duke University School of Law who focuses on securities regulation said:
“It’s an enforcement nightmare for the SEC. The question is: where does the manipulation start and when does trading on your own hunches and publicizing your hunches start?”
James Angel, a finance professor at Georgetown University, said:
“If you can actually catch people knowingly passing on fraudulent information, then that is clearly illegal. If all they are doing is saying, ‘hey I think this company is a good buy,’ there’s not a lot anybody can do about that.”
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