On January 27, GameStop shares reached their record closing price of $347.51. However, this upturn did not last long. As major hedge funds squared out their positions, the retail interest has dropped.
On Thursday, shares of video game retailer GameStop Corp (NYSE: GME) plunged drastically, closing 42.11% down, at $53.50 per share. After hours, they fell by a further 8%. With this drop, GameStop stock is more than 83% down this week. Notably, it plunged just several days after reaching a peak at around $483 last week.
Volatility of Reddit’s Favourite
Last week, GameStop stock created a massive buzz on Wall Street due to Reddit-based retail investors. They sought to “squeeze” hedge funds that had been using short sales in a bet they could profit from a decline in the struggling retailer’s share price. As a result, they triggered massive buys against hedge fund shorts, which led the latter to billions of dollars in losses.
GameStop stock was seen as an opportunity for Reddit investors. On January 27, GameStop shares reached their record closing price of $347.51. However, this upturn did not last long. As major hedge funds squared out their positions, the retail interest has dropped. The price of GameStop shares tanked as well. From the daily high of $469, the GME stock has dropped all the way to under $100.
As a result of the price drop, those betting against GameStop suffered losses. For example, Melvin Capital Management hedge fund lost 53 per cent on its investments in January. Another fund, Citron Capital, which also bought a stake in GameStop, announced they would stop the practice of short selling. Instead, its focus would be on ‘long’ opportunities or blue-chip companies.
GameStop Stock Short-Term Expectations
Despite this week’s decline, GameStop shares remain up 184% so far in 2021. According to one Reddit user Meminem, there is a second wave of GME rise coming. He said:
“After hearing about you heroes on the news I decided to open an Etrade account (because this is the second time I’ve seen Robinhood freeze its own clientele out of fat gainz), and those funds are taking 5 days to become available.”
However, analysts said they would likely look at online forums where mass buying of GameStop was discussed last week, and on the role of hedge funds in financial markets.
Andrea Cicione, head of the strategy at TS Lombard, stated:
“Any kind of market distortion by investors agreeing to cause the distortion goes against the smooth and transparent functioning of markets. The reason this might not be covered by regulation yet is simply because it has never happened before. But now it might find its way into regulation in a more explicit way.”
Currently, the Washington regulators are looking into the rally of GameStop to root out any potential market manipulation in the stock’s volatility. If necessary, further action will be taken.