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The extraordinary surge in the share price of the ailing US video games retail GameStop and other companies has drawn the attention of the White House and the US regulator, the Securities and Exchange Commission, which both said they were “monitoring” the situation.
There has been a surge of bets by small investors, who are discussing their investments in online forums such as Reddit. GameStop’s shares have soared this year, from $3.25 in April, to $347.51 last night. The three largest shareholders in GameStop have made more than $2bn from the company’s astronomic recent share rise.
It has turned into a David-and-Goliath style battle between small investors and Wall Street firms. Yesterday, a US hedge fund that had invested heavily betting on the failure of the struggling video game store – a practice called ‘shorting’ – pulled out. Melvin Capital Management, one of a number of Wall Street firms that stood to make money for investors if GameStop’s shares plummet, told CNBC it had closed out its short position after taking a huge loss.
Michael Hewson, chief market analyst at CMC Markets UK, says:
While few people are shedding many tears about large scale hedge fund losses, after all if you play with fire, be prepared to get burned, the market turmoil is highlighting a number of areas within the market, that might prompt regulatory scrutiny in the future, namely the monitoring of retail trade chat forums and message boards, and how they drive markets.
With large numbers of small investors swarming over heavily shorted stocks in what looked like a coordinated move, the frenzy raises all sorts of questions with respect to possible market manipulation.
It is already illegal for institutions to coordinate in the manner currently being seen in moving prices on these stocks, raising questions about the legality of what is currently taking place right now on these forums. Regulators have already said that they are monitoring what is going on, raising the possibility of further action if it causes further market instability.
Global stock markets took a bit of a battering yesterday, with the Dow Jones posting its biggest one day fall since October, and European markets are set to open lower this morning. Asian shares were also in the red, with Japan’s Nikkei closing 1.53% lower and Hong Kong’s Hang Seng losing 2.36% and the Australian market shedding 2.02%.
The US Federal Reserve issued a slightly more downbeat assessment when it left its policy stance unchanged last night, with interest rates near zero, and monthly bond purchases of $120bn.
The Fed acknowledged in its post-meeting statement that the economic recovery weakened in the final two months of last year, but balanced that near-term pessimism with greater optimism that vaccines had reduced the medium-term risks to the outlook.
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