GameStop: The herd mentality of retail players ruffles the feathers of the old guard
From time to time, the financial markets are given a rude awakening by an obscure situation or event, which is exactly what we saw last week, says David Madden, market analyst at CMC Markets UK, this morning.
“A swarm of retail investors, who were chatting with each other on Reddit, started snapping up GameStop shares. It was known that relatively large short positions have been taken out against the stock, so the gang of retail investors were buying up the stock in a bid to create a short squeeze,” Madden told City PM
The result was that GameStop shares skyrocketed. A number of hedge funds incurred sizeable losses due to the monster rally. Other heavily shorted stocks like AMC Entertainment saw colossal moves higher too.
“Initially there was a feeling of surprise that a group of retail participants could end up inflicting such pain on big investment houses. Then concerns started to grow that funds would liquidate profitable positions in a bid to meet margin requirements for losing trades. Stocks fell across the board due to fears that some investment groups would adopt a cut and run policy,” Madden explained.
Trading apps
Some of the fear was stemmed by the news that certain trading apps used to purchase the volatile stocks introduced restrictions or even blocked the opening of new positions, he continued. In some quarters of the market, there was outcry by the decisions but the brokerages cited regulatory and risk management procedures for the moves.
On Thursday night, the trading apps eased up on some of the restrictions with respect to trading certain stocks. Fear returned to the markets on Friday as worries resurfaced that selected stocks would be in for a surge in volatility again, Madden noted.
“The herd mentality of the retail players ruffled the feathers of the old guard. It highlighted how much disruption could be caused when individuals band together,” he added.
The regulator expressed concerns about the Reddit-retail investor situation. Seeing as some trading apps have curtailed activity on selected markets, it is entirely possible they will do it again, so we are less likely to see the manic moves that GameStop witnessed last week.
“At the root of the frenzied buying has been companies that have been heavily shorted, US airlines saw some volatility last week which influenced European air carriers,” Madden concluded.