NEW YORK (BLOOMBERG, REUTERS) - GameStop snapped a dizzying six-day rally to wipe out nearly US$11 billion (S$14.6 billion) in market value on Thursday (Jan 28) after moves by brokerages to curb trading of the stock on their apps whipped up volatility and enraged the company's retail fanbase.
The stock plunged 44 per cent during regular trading hours after Robinhood Markets, Interactive Brokers Group, E*Trade Financial and others took steps to curtail activity in several high-flying stocks, including GameStop and AMC Entertainment Holdings.
The video-game retailer on Thursday triggered 19 volatility halts on its way to shedding more than twice what it was worth on Monday. Volume also fell, with about 55 million shares traded by Thursday afternoon, a far cry from Friday's record of 197 million.
But in the latest turn of the GameStop roller-coaster, its shares surged 34 per cent in after-hours trading on Thursday after Robinhood said it would allow its customers to resume trading on the company.
The earlier trading curbs resulted in howls of outrage on Reddit's WallStreetBets forum, which has been the launching point for many of this week's blistering rallies, and Robinhood was hit by lawsuits from customers.
It also prompted lawmakers to criticise restrictions imposed on retail investors.
Democratic Senator Sherrod Brown, the incoming Senate banking chairman, said he plans to hold a hearing on the "current state of the stock market."
The clampdown by brokerages extended beyond GameStop to other popular stocks such as BlackBerry that have surged this week, burning short sellers and hedge funds.
The phenomenon attracted the attention of regulators on Wednesday, with the Securities and Exchange Commission saying it was actively monitoring the situation.
"The inability to trade depressed the volume, and high volume is what kept the stock trading at a high level," said Wedbush Securities analyst Michael Pachter.
"I'm actually surprised the trading platforms think they can manage the market this way, and expect they will reverse their decision shortly.
Meanwhile, Facebook took down a popular Wall Street discussion group, Robinhood Stock Traders, in a move that its founder on Thursday described as backlash for conversations buoying shares of GameStop and other companies this week.
Allen Tran, a 23-year-old from Chicago who created Robinhood Stock Traders, said he woke up on Wednesday to a notification that Facebook had disabled the 157,000-member group. The notification, seen by Reuters, said without detail that the group violated policies on "adult sexual exploitation."
"We were first on the picking tree to be cut off because we are on Facebook, not a free platform like Reddit," said Mr Tran, referring to the typically lighter moderation on the discussion website.
Some of his group's members made tens of thousands of dollars in recent trades first popularized on Reddit's WallStreetBets forum, he said.
For a brief moment on Thursday morning, GameStop became the biggest stock on the Russell 2000, taking over from Plug Power. The video-game retailer has advanced more than 900 per cent this year, fuelling a rally in retail trading across the board and leading some short sellers to throw in the towel. However, that rally seemed to stall out on Thursday.
"With a company like GameStop, at some point it comes back to Earth. Even the folks on Reddit know that," said Jerry Braakman, chief investment officer of First American Trust in Santa Ana, California, which manages around US$2 billion. "The market's going to find the right price, the price that's not a short-term squeeze price."
Trading has remained volatile since the last regular US session, in which the stock rose 135 per cent. Gains were briefly pared postmarket after the Reddit page that has fuelled this month's surge was made private and then later reopened by the group's moderators.
In the time the original WallStreetBets board was down, an alternate forum called Wallstreetbetsnew topped 350,000 members.
"This will burn itself out, like any other mania, but there will likely to be some impact on the market as a whole," said Marshall Front, chief investment officer at Front Barnett Associates. "That these eye-popping moves happen after a nearly 70 per cent move in the S&P since March shows there's plenty of room for a pullback."
GameStop shares would be worth US$125.75 in a best-case scenario, compared to its close of US$193.60, said Baird analyst Colin Sebastian. That assumes a successful transition that maintains its current market share, preserves its used-game business, and diversifies into other services, he wrote in a report.
Mr Sebastian laid out four different scenarios for the stock, ranging from "bright blue sky" to "storm cloud."
Baird has a US$13 share price target with a hold-equivalent rating.
GameStop's rise has prompted analysts at Citigroup to warn investors that some exchange-traded funds face an outsized influence from the video-game retailer as its boom has altered their composition.
Analyst Scott Chronert advised clients to take "special note" of ETFs that incorporate leverage in their funds. A larger allocation to the stock may materially change fund performance for now until rebalance dates occur, he said in a report.
The Reddit community has dominated equities trading all week as retail traders target heavily shorted shares, causing ripples across the market. Investors including Melvin Capital closed out its short position on GameStop, while Muddy Waters' Carson Block said he "massively reduced" its short positions in recent days to avoid getting burned.
"It's hard to say what is next, but the chat room investors may not go away so easily," said Joseph Feldman, analyst at Telsey Advisory Group.
He double-downgraded the stock to underperform from outperform on Monday, removing GameStop's only buy-equivalent recommendation.