REUTERS: Shares of GameStop Corp and others favoured recently by retail investors fell further on Thursday, while U.S. Treasury Secretary Janet Yellen said she needed to “understand deeply” the trading frenzy that has gripped Wall Street.
A swarm of buying by amateur traders over the past two weeks sparked big moves in shares of companies that hedge funds had bet against. Some framed it as a battle between Wall Street and Main Street.
Many of the so-called “Reddit rally” stocks fell sharply this week.
GameStop shares closed Thursday down 42 percent at US $ 53.50, far from their peak of US $ 483 a week ago. AMC Entertainment has lost about two-thirds of its value after two weeks of wild swings.
The family behind Koss Corp and some of the headphone maker’s top executives raked in about US $ 45 million from a surging stock price during the rally.
Kim Forrest, Chief Investment Officer at Bokeh Capital Partners in Pittsburgh, said retail investors who got burned buying at the highs were likely to be more cautious bidding up shares of companies with a high short interest.
Retail investors “can see that this is a roller-coaster ride and not a one-way trip up and that’s probably given them a little more pause before pushing the buy button.”
Some investors may once again be setting their sights on stocks they believe are overvalued.
Health insurance start-up Clover Health, which is backed by venture capitalist Chamath Palihapitiya, ended down 12 percent after it was criticised in a report by Hindenburg Research.
On WallStreetBets, the Reddit forum at the centre of the squeeze that has hurt hedge funds and other “short” sellers, some denizens urged each other to hold the line and not sell GameStop.
Others expressed frustration at the stock’s big drop. “It’s funny how everyone on here is telling others to hold but stock keeps falling meaning y’all are actually selling,” said a user with the handle the_undergroundman. “You’re getting played by your own brethren.”
Despite this week’s declines, GameStop shares remain up 184 percent so far in 2021, AMC up over 200 percent and Koss over 400 percent year to date.
Ahead of the Thursday meeting, Yellen said on ABC’s “Good Morning America” that she and other regulators were seeking to “understand deeply” what had happened before considering action.
Yellen was to meet with heads of the U.S. Securities and Exchange Commission (SEC), Federal Reserve Board, Federal Reserve Bank of New York and Commodity Futures Trading Commission.
Analysts said they would likely look at online forums where mass buying of GameStop and AMC was discussed last week and on the ever-larger role of hedge funds in financial markets.
“Any kind of market distortion by investors agreeing to cause the distortion goes against the smooth and transparent functioning of markets,” said Andrea Cicione, Head of Strategy at TS Lombard.
“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.”
Credit rating agency Fitch said late Thursday that U.S. financial institutions face second order effects from GameStop volatility and that social media raises retail investors’ impact, which may have long-term implications for financial firms.