(Bloomberg) — GameStop Corp. was in danger of falling for the first time insix days, trimming a massive rally, after moves by brokerages to curb trading of the stock on their apps whipped up volatility and enraged the company’s retail fanbase.
The stock plummeted as much as 68% Thursday after Robinhood, Interactive Brokers and others took steps to curtail activity in several high-flying stocks, including GameStop and AMC Entertainment Holdings Inc. The stock was down 22% to $270.01 as of 12:30 p.m. in New York, triggering at least 17 trading halts.
The moves resulted in howls of outrage on Reddit’s WallStreetBets forum, which has been the launching point for many of this week’s blistering rallies, and Robinhood was hit by lawsuits from customers. It also prompted Democrat and Republican lawmakers to criticize restrictions imposed on retail investors.
Read more: Ocasio-Cortez, Republican Cruz Rebuke Robinhood on Curbs
The clampdown by brokerages extended beyond GameStop to other high flying stocks such as BlackBerry Ltd. that have surged this week, burning short sellers and hedge funds. The phenomenon attracted the attention of regulators Wednesday, with the Securities and Exchange Commission saying it was actively monitoring the situation.
“I’m actually surprised that trading platforms are getting involved,” said Wedbush Securities Inc. analyst Michael Pachter. “Unless there is something screwy about the trading that suggests manipulation, they really should get out of the way and allow investors to trade whatever they wish.”
For a brief moment Thursday morning, GameStop became the biggest stock on the Russell 2000, taking over from Plug Power Inc. The video-game retailer has advanced more than 1,300% this year, fueling a rally in retail trading across the board and leading some short sellers to throw in the towel. However, that rally seemed to stall out on Thursday.
“With a company like GameStop, at some point it comes back to Earth. Even the folks on Reddit know that,” said Jerry Braakman, chief investment officer of First American Trust in Santa Ana, California, which manages around $2 billion. “The market’s going to find the right price, the price that’s not a short-term squeeze price.”
Trading has remained volatile since the last regular U.S. session, in which the stock rose 135%. Gains were briefly pared postmarket after the Reddit page that has fueled this month’s surge was made private and then later reopened by the group’s moderators. In the time the original WallStreetBets board was down, an alternate forum called Wallstreetbetsnew topped 350,000 members.
“This will burn itself out, like any other mania, but there will likely to be some impact on the market as a whole,” said Marshall Front, chief investment officer at Front Barnett Associates. “That these eye-popping moves happen after a nearly 70% move in the S&P since March shows there’s plenty of room for a pullback.”
Shorts Exit
Gamestop’s rise has prompted analysts at Citigroup Inc. to warn investors that some exchange-traded funds face an outsized influence from the video-game retailer as its boom has altered their composition. Analyst Scott Chronert advised clients to take “special note” of ETFs that incorporate leverage in their funds. A larger allocation to the stock may materially change fund performance for now until rebalance dates occur, he said in a report.
The Reddit community has dominated equities trading all week as retail traders target heavily shorted shares, causing ripples across the market. Investors including Melvin Capital closed out its short position on GameStop, while Muddy Waters’s Carson Block said he “massively reduced” its short positions in recent days to avoid getting burned.
(Updates share price moves throughout, adds more details.)
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