GameStop shares tumble 60% as broader market swells

The video game retailer's improbable rise - shares jumped 400% last week - was sparked by individual traders and goaded on by a Reddit forum and other online trading communities who wanted to defy the hedge funds that had bet that the stock would lose value. The pushback shook the institutional powers of Wall Street, provoking fresh scrutiny of the financial services industry and a new ecosystem of social-media-powered retail stock trading.

The party is winding down: GameStop closed Tuesday at $90.21, meaning it's lost 70% of its value this week.

U.S. stocks climbed in anticipation of robust earnings reports from Amazon and Alphabet and continued to claw back from a chaotic January. The Dow Jones industrial average closed up Tuesday nearly 476 points, or nearly 1.6%, at 30,687.81. The S&P 500 climbed more than 52 points, or nearly 1.4%, to 3,826.31, while the tech-heavy Nasdaq added 209 points, or nearly 1.6%, to settle at 13,612.78.

The broader market seems to have moved past the collective "shaking in the boots" about the systemic risks fueling the frenzied trading of GameStop and other shorted stocks, said Michael Mussio, president of FBB Capital Partners. He noted investors' hopeful attitudes about vaccine distribution and corporate earnings from Amazon, Google and Chipotle, companies he called "growth drivers of the economy."

Other assets and securities that had attracted intense investor interest in recent days, including AMC Entertainment, and BlackBerry, also lost ground Tuesday, sliding 41%, 21% and nearly 9%, respectively. Some posters on the Reddit message board WallStreetBets blamed those declines on the brokerage firms that have placed restrictions on buying shares of certain shorted companies.

Silver also retreated, falling more than 9.6%, a day after retail investors powered up the price of the precious metal more than 7%. Some investors appeared to adapt their GameStop playbook to the commodity, while others within the WallStreetBets community warned against the investment as a distraction that would benefit hedge fund managers.

Mussio expressed doubts last week that the rally propelling GameStop and AMC would be long; now he says it will run its course soon.

"There's certainly a sentiment of buying GameStop is my way of sticking it to the man and that's fine, but that's maybe not the best investment strategy," he said. "The sheer volume, the price action, would lead us to believe it's not just individual investors but institutions moving around that money, as well."

But many WallStreetBets investors are determined to hold on to their GameStop shares and positions in other shorted companies that have largely tumbled since last week's rally.

Jake Graham, 25, a mobile diesel technician in Lubbock, Texas, started investing to help pay off his student loans. When he first joined the subreddit in July, he was hesitant to follow the advice of investor members - but when the GameStop rally started in January, he realized there was merit to the online forum's predictions.

Graham now holds nearly 47 shares of GameStop and seven shares of AMC, which he said he plans to hold on to for as long as he can despite today's declines.

During the 2008 financial crisis, "you see videos of Wall Street just up in their buildings and laughing at people protesting. Billions of dollars were lost, and they didn't care. They were sipping their champagne and laughing," he said, explaining why it is worth it to him to see how long retail investors can prevail. "I'm not that worried now."

As of Tuesday afternoon, the popular trading platform Robinhood maintained a list of five restricted stocks: GameStop, AMC, Nokia, Naked and Express. The app limits customers who already own those brands in sufficient numbers from purchasing more, and it bars new customers from buying those stocks above a certain number of shares.

Robinhood has played a central role in the Wall Street drama as a key facilitator for an army of retail trailers and, conversely, for acting as a chokepoint in the middle of the speculative frenzy. Like other stock trading apps, Robinhood temporarily froze customers' ability to buy GameStop and other highly sought-after shares, prompting a wave of selling and a vocal backlash from customers, lawmakers and business leaders.

The company has since announced that it has taken in $3.4 billion in investments to secure its own financials. And the trading app, in a flurry of crisis management public relations, has stated in tweets and blog posts that it limited stock buying in volatile securities to ensure that it met rules on capital requirements.

On Tuesday, Robinhood issued a statement calling for financial regulators to allow for real-time settlement of U.S. equities, meaning the brokerage firm could settle investor trades immediately rather than two days later.

"Last week we saw the impact the two-day trade settlement period has on investors and ultimately the entire American financial system. Clearinghouse deposit requirements skyrocketed overnight. People were unable to buy some of the securities they wanted. Investors were angry and concerned, an unintended byproduct of the antiquated settlement process," the company said in a blog post. "The existing two-day period to settle trades exposes investors and the industry to unnecessary risk and is ripe for change."