stockmarket

GameStop shares surge more than 100% as trading frenzy returns


GameStop shares surged almost 60% in pre-market trading after more than doubling on Wednesday, as the trading mania that engulfed the videogame retailer’s stock last month returns.

GameStop shares climbed nearly 104% on Wednesday in a turbulent session which temporarily halted trading in the stock twice as its price surged.

GameStop closed at $91.71 in a day when more than 80m of its shares changed hands, a level not seen since January, as the investor frenzy continued to push the price up a further 85% after hours.

The shares look set for another tumultuous day on Thursday, spiking more than 60% to $146 in pre-market trading ahead of the opening bell on Wall Street.

The latest rally has surprised analysts who thought stability had returned to the stock following the trading mania last month in the battle between online traders and Wall Street hedge funds.

Q&A

What is ‘shorting’ or the short-selling of shares?

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The conventional way to make money from shares is to buy at a low price then sell at a high price. It is called going long. Shorting is the opposite: buying high and selling low.

The approach of hedge funds is to target a share they believe is heading for a fall. But the only way to make a profit is by not really owning those shares in the first place, rather “borrowing” them. Typically, the hedge fund borrows them, at a small fee, from a pension fund that is holding them for the long term.

The investor (speculator is probably a better word) borrows, say, 10,000 BP shares and promises to return them at a fixed time – let’s say in a month. The speculator instantly sells the BP shares at the going market price – say 500p, giving them £50,000.

In a month’s time, when they have to return the shares to the pension fund, the shares have fallen to, say, 400p. So the speculator goes into the market, buys 10,000 shares for £40,000 and hands them back, making a profit of £10,000 along the way. But if the shares have risen to 600p, they will make a loss of £10,000.

The reality is rather more sophisticated than this – speculators rarely take actual delivery of shares, and use other methods such as CFDs (contracts for difference) and short ETFs (exchange traded funds) – but the principle is the same.

In January 2021, the struggling Texas-based video game store chain GameStop became the focal point of a battle between an army of small investors – using online chatrooms such as Reddit’s WallStreetBets – who piled into the shares, driving them sky-high, and Wall Street hedge funds, which had been shorting the stock and made big losses. Other stocks and silver were also caught up in the trading frenzy.

Patrick Collinson and Julia Kollewe 

“If you thought the GameStop saga was over, well think again,” said Russ Mould, investment director at AJ Bell. “January’s Reddit-inspired trading frenzy might be about to return.”

Other so-called “stonks” – an intentional misspelling of “stocks” – favoured by retail traders on sites such as Reddit’s WallStreetBets, also shot higher. AMC Entertainment gained 18%, Koss rallied more than 50% and BlackBerry rose nearly 9%. Shares of Canadian cannabis company Tilray gained nearly 13%.

Analysts could not pinpoint one reason for the sharp move. At least one ruled out a short squeeze like that which fired the “Reddit rally” in January when small investors bought GameStop furiously to punish hedge funds that had bet against the retailer.

Some Twitter users pointed to an activist investor’s tweet of an ice cream cone picture. Others cited factors including a reshuffling of top executives and options trading.

Shortly before 2pm on Wednesday, the activist investor Ryan Cohen, a major shareholder of GameStop and founder of Chewy.com, tweeted a picture of a McDonald’s ice cream cone with a frog emoji. Some GameStop bulls wondered online whether it was a veiled message that Cohen would fix GameStop’s business, like the fast-food chain fixed its ice-cream machines.

“I don’t know what an ice-cream means,” said Michael Pachter, an analyst covering GameStop at Wedbush Securities. “People are looking for signals.”

Others pointed to the resignation of GameStop chief financial officer, Jim Bell, as the company focuses on shifting into tech-driven sales.

“GameStop announced the resignation of its CFO last night. Some may have taken this as a good sign that RC Ventures is making a difference at the company in terms of trying to accelerate the shift to digital,” said Joseph Feldman, an analyst at Telsey Advisory Group.

Stephanie Wissink, analyst at Jefferies Research cited her research report noting that Bell resigned after the company settled with activist investor Ryan Cohen’s RC Ventures. Her note said the chain of stores would likely signal a change in business model by going after “a CFO with a more extensive tech (vs. retail) background.”

Ihor Dusaniwsky, managing director of predictive analytics at analytics firm S3 Partners, said short covering was “not the predominant reason for this price move”.

“It’s mostly long-buying with short-covering sprinkled in,” Dusaniwsky said.

Fewer than 18m GameStop shares were shorted as of Tuesday, down from over 70m in early January, according to S3.

Some said options trading may have amplified the move.

Henry Schwartz, head of product intelligence at Cboe Global Markets, said the most active options contracts for GameStop were in calls around the $50 and $60 strike prices, expiring Friday.

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Schwartz added that when the stock started jumping after 2:30pm, whoever had a short position in those contracts may have had to buy GameStop stock to hedge their position.

GameStop devotees on Reddit’s popular WallStreetBets forum expressed surprise.
“Why is GME going up?” one retail trader asked on WallStreetBets. “Because we like the stock”, another replied.

Another user posted: “I missed out on GME the first time, I*m not making that mistake again. TO THE MOON”.



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