Another bout of selling gripped the US stock market Friday (US time), as anxiety mounts over whether the frenzy behind a swift, meteoric rise in GameStop and a handful of other stocks will damage Wall Street overall.
The S&P 500 dropped 1.9 per cent, giving the benchmark index its biggest weekly loss since October. The Dow Jones Industrial Average and Nasdaq each fell 2 per cent.
GameStop shot up nearly 70 per cent, clawing back much of its steep loss from the day before, after trading app Robinhood said it will allow customers to start buying some of the stock again.
Robinhood and other retail brokerages yesterday took steps to tamp down the speculative frenzy by telling investors they would only be able to sell their positions and not open new ones. Numerous members of Congress suggested that those actions treated small investors unfairly and called for Congressional investigations into the situation.
GameStop has been on a stupefying 1600 per cent run over the past three weeks and has become the battleground where swarms of smaller investors see themselves making an epic stand against the 1 per cent.
The assault is directed squarely at hedge funds and other Wall Street titans that had bet the struggling video game retailer's stock would fall. Those firms are taking sharp losses, and other investors say that's pushing them to sell other stocks they own to raise cash. That, in turn, helps pull down parts of the market completely unrelated to the revolt underway by the cadre of smaller and novice investors.
The maniacal moves for GameStop and a few other formerly beaten-down stocks has drowned out many of the other issues weighing on markets, including the virus, vaccine rollouts and potential aid for the economy.
"Our consideration is whether this is something that is a long-term influence or contained within a handful of companies," said Tom Hainlin, national investment strategist at US Bank Wealth Management.
Meanwhile, calls for regulators to step in are growing louder on Capitol Hill, and the Securities and Exchange Commission says it's carefully monitoring the situation.
"You've seen a lot of volatility this week, so when you have some unknowns like what you're seeing in the retail trading world, people are a little concerned at record highs here and taking some money off the table," said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors.
Wall Street's focus remains squarely on GameStop and other moonshotting stocks. AMC Entertainment jumped 53.7 per cent, and headphone company Koss vaulted 52.5 per cent. After their success with GameStop, traders have been looking for other downtrodden stocks in the market where hedge funds and other Wall Street firms are betting on price drops.
By rallying together into these stocks, they are triggering something called a "short squeeze". In that, a stock's price can explode higher as investors who had bet on price declines scramble to get out of their trades.
The smaller investors, meanwhile, have been crowing about their empowerment and saying the financial elite are simply getting their comeuppance after years of pulling away from the rest of America.
"We've had their boot on our necks for so [expletive] long that the sudden rush of blood to our brains when we have just a chance of getting free has made me feel ... well, it's made me feel," one user wrote on a Reddit discussion about GameStop stock.
"I've been isolated throughout this entire pandemic and live in a state far from home or any sense of community," another user replied. "I'd kind of just ... given up. These last few weeks I've started caring again; feeling impassioned again; wanting more again."
Most of Wall Street and other market watchers say they expect the smaller-pocketed investors who are pushing up GameStop to eventually get burned. The struggling retailer is expected to still lose money in its next fiscal year, and many analysts say its stock should be closer to US$15 than US$330.
In response, many users on Reddit have said they can keep up the pressure longer than hedge funds can stay solvent, although they often use more colourful language to say that.
The SEC said Friday that it is evaluating "the extreme price volatility of certain stocks' trading prices", warning that such volatility can expose investors to "rapid and severe losses and undermine market confidence".
Jacob Frenkel, a former SEC enforcement attorney and federal prosecutor, suggested it may have made sense for the market watchdog agency to suspend trading for up to 10 days in GameStop stock, under its legal authority.
Merely monitoring the situation, without SEC action, "is like putting safety experts in a permanent front-row seat in front of a runaway roller coaster", Frenkel said.
An enforcement investigation by the SEC would need to determine whether there were violations of the securities laws, said Frenkel, who heads the government investigations practice at law firm Dickinson Wright.
Both the Senate Banking Committee and the House Financial Services Committee plan to hold hearings on the GameStop controversy.
Democrat Representative Brad Sherman, who heads the Financial Services subcommittee on investor protection, entrepreneurship and capital markets, said lawmakers will examine, for example, whether Robinhood may have blocked customers from buying the stocks at the behest of other market players with competing interests. Other issues to be aired include the need for fuller disclosure requirements for short sellers, as now prevail in Europe and Britain, Sherman suggested.
"The capital markets need to be less of a casino and more of a place where people ... can invest in companies that are leading the new economy," Sherman said.