GameStop, AMC shares surge after Reddit users lead chaotic revolt against big Wall Street funds

GameStop shares more than doubled, to $347.51, and have soared more than 400% this week. AMC, beleaguered by the coronavirus pandemic and stay-home measures, quadrupled to $19 a share.

The GameStop and AMC price surges were so dramatic that trading for both companies was temporarily halted by the stock exchanges to temper volatility. But once trading resumed, prices took off again. TD Ameritrade, a leading trading platform, took the unusual step of imposing restrictions on both stocks, citing "an abundance of caution amid unprecedented market conditions."

The extraordinary trading, which many analysts linked to a pandemic-related surge in day trading by average investors, seemed disconnected from the companies' financial prospects. GameStop, which sells video game software in brick-and-mortar retail outlets, has lost money in five of the past six quarters. Revenue in the three-month period that ended in October was down 31% from the same period one year earlier.

As officials at the White House and the Federal Reserve offered statements of reassurance, there were signs that market watchdogs at the Securities and Exchange Commission will scrutinize the unusual trading.

Federal securities law prohibits market participants from misrepresenting a company's prospects to artificially affect its share price. With Reddit users cloaked in anonymity, there is no way of knowing whether messages touting GameStop come from average joes or scam artists executing a "pump-and-dump" stock scheme.

In a statement after the markets closed, Allison Herren Lee, the SEC's acting chair, and two subordinates, said the commission was "actively monitoring the ongoing market volatility in the options and equities markets" and was working with other regulators "to assess the situation and review the activities" of those involved.

"Folks at the SEC are going to want to take a very close look at this," said Harvey Pitt, who chaired the commission from 2001 to 2003. "When you have extreme volatility of this nature, the system is not necessarily working correctly . . . You're starting to see things that would look to a regulator as if they were manipulation."

The soaring stock prices for companies that many professional investors scorn illuminated the striking influence of social media, or what Peter Atwater, an economics lecturer at the College of William & Mary, calls a "flash mob with money."

In their open challenge to the deep-pocketed hedge funds that bet on individual stock prices falling, the online mob brandishes an us-against-them rhetoric that echoes the populism of former president Donald Trump's supporters.

Posters savaged CNBC, the financial news channel, for allegedly siding with Wall Street firms over the ordinary investor. One post touting GameStop was tagged "bankrupting institutional investors for Dummies."

On Twitter, Anthony Scaramucci, a hedge fund manager who was briefly a Trump adviser, wrote: "We are witnessing the French Revolution of finance."

Still, to many analysts, the frenzied buying that has driven the shares of companies such as GameStop into a vertical climb was uncomfortably reminiscent of the dot-com era financial bubble, which ended with technology stocks losing more than half their value. Some described the Dow Jones industrial average's 63% gain from its March lows as evidence that the Federal Reserve's near-zero interest rates were fueling a similar craze.

"Activity like this has been going on since the beginning of markets, but there is no question that the Fed's easy money policy has been the liquor that has made many market participants drunk," Peter Boockvar, chief investment officer for Bleakley Advisory Group.

Wednesday's trading frenzy played out amid a decline in the broader market. The Dow fell nearly 634 points, or 2.1%, as investors sorted through a mixed bag of corporate earnings. The broader S&P 500 dropped nearly 99 points, or 2.6%, while the tech-heavy Nasdaq shed about 355 points, or 2.6%.

Treasury Secretary Janet Yellen and the rest of the Biden administration's economic team are monitoring the matter, White House press secretary Jen Psaki told reporters at a midday briefing, adding that "the stock market is not the only measure of the health of our economy."

Federal Reserve Chair Jerome Powell, speaking at a scheduled news conference, said he would not comment "on a particular company or day's market activity."

The stunning rise in AMC and GameStop shares has become one of Wall Street's most-watched dramas, pitting an apparent army of retail investors against wealthy institutions. Some of the Reddit participants, who had organized in the message board r/wallstreetbets, said they were punishing Wall Street and "democratizing" trading.

In a Twitter thread Wednesday, Reddit co-founder Alexis Ohanian said the mood on the message boards was one of retribution against big institutions. "This is an echo of what we've seen social media enable the public to challenge institutions for the last decade," he said. "And also - please - don't invest money you can't afford to lose, ESPECIALLY, in risky investments."

For weeks, users posting on r/wallstreetbets have rallied support for GameStop, which has been targeted by hedge fund short sellers as it struggles to adapt its brick-and-mortar business for the age of e-commerce.

The message board known as "wsb" describes itself as "like 4chan found a Bloomberg terminal," in a reference to the anything-goes discussion site and the sophisticated software package used by financial professionals.

In daily posts, wsb's 3.3 million members trade irreverent jibes, make liberal use of the f-word and cheer one another's winning investments.

The Reddit posters began betting last year that GameStop's stock price would rise, challenging Wall Street short sellers wagering the opposite. As the shares rose, the Wall Street traders have been forced to take massive losses.

Among those rooting on the Reddit crowd this week was Elon Musk, the chief executive of Tesla, who tweeted "Gamestonk!!" with a link to the message board. (Musk has waged his own battles against short sellers, saying in 2018 that "what they do should be illegal.")

"GameStop has become a pyramid scheme," said Michael Pachter, an analyst with Wedbush Securities. Investors buying the stock at $200 are convinced someone else will buy it from them at $250, he said but that won't last forever.

"Pyramid schemes work as long as new investors believe there will be new investors behind them; when it's clear nobody else is going to come in, they are less likely to participate."

Over the past week, the Reddit board has started putting its support behind AMC, which recently announced that it had raised nearly $1 billion to avoid bankruptcy. Its stock price also has jumped.

Other stocks that had fallen out of favor with institutional investors, such as BlackBerry and Bed, Bath and Beyond, also are enjoying a second act.

On the Reddit forum, participants who said they were ordinary investors celebrated their collective efforts to take down big hedge funds. This week, Melvin Capital, a large hedge fund, was forced to seek a financial rescue from two other funds.

Citadel and Point72 Asset Management injected a combined $2.75 billion into the wounded short seller in return for a stake in future revenue. Melvin lost big after betting that GameStop's stock would fall.

John Stark, former director of the SEC's office of Internet enforcement, said the commission almost certainly has taken the first steps to investigate the trading activity.

"I can't imagine there isn't an open investigation and probably a formal order to find out who's on these message boards," he said.

Some Reddit users seem to have the same idea. "Dear SEC. I may be guilty for a lot but if you give me a deal ill gladly rat out a bunch of other people," user w8w8dont posted on Wednesday.

But James Angel, a finance professor at Georgetown University, said proving wrongdoing could be difficult. "It's going to be hard for the SEC to find blatant manipulation, but they owe it to look," he said. "The normal locker-room chatter you see in these chat rooms is probably not enough to get convictions. But are there bigger players here? We'll see."

To establish manipulation that runs afoul of securities laws, Angel said regulators will need to prove that traders engaged in "an intentional act to push a price away from its fundamental value to seek a profit." In market parlance, this is typically known as a pump-and-dump scheme: Participants buy a stock; artificially inflate its price, say, by circulating rumors about the company; then sell for a profit.

There is no evidence yet of such a strategy behind the surge in GameStop and other stocks, Angel notes. The SEC probably will examine "who's really moving the market. Is it a bunch of Robinhooders trading 10 shares each, or are there larger players out there engaging in a bigger pump-and-dump?" he said.

Customers of several retail brokerage firms - including TD Ameritrade, Robinhood Crypto, E-Trade, Charles Schwab, Fidelity Investments, Vanguard and Interactive Brokers - experienced service disruptions Wednesday morning, which many attributed to higher volume. The website Downdetector reported log-in and website problems for some of the firms, as well as Reddit, starting after 9 a.m. Eastern, with most issues resolved within an hour.

R/wallstreetbets also experienced service issues as volunteer moderators briefly set the group to private Wednesday morning to keep up with the morning's frenzy of activity, a company spokeswoman said.