To recap my previous post, the U.S dollar remains in a downtrend and commodities continue rising despite some weakness this week. With the possibility of increased inflation on the horizon, commodities are well positioned for a sustained bull market in the years to come. China continues to drive demand for metals and soft commodities around the world due to its relatively quick economic recovery from the Covid-19 pandemic.
The pandemic has severely impacted the labor market with millions having lost jobs. Robinhood’s trading application with commission-free trading has changed the game. More and more firms now offer free commissions following Robinhood’s lead. People now have time to look for opportunities in the stock market, utilize low or no-cost vehicles, and free information to make trading decisions through social media.
The main topic this week relates to GameStop Corporation (GME), BlackBerry (BB), and AMC Entertainment Holdings (AMC). A little background will help. There is a forum called R/Wallstreetbets on Reddit. It was started back in 2012 as a forum allowing its members to share trading ideas that would typically be high risk and high reward as explained by its founder Jaime Rogozinski. There are over 5 million participants in the forum today. One recent idea shared in the forum was to buy shares of several heavily shorted stocks. The idea is that with short interest on GME at over 100% of the number of the company’s tradeable shares (the float), they could drive up GME’s price and short sellers would be forced to buy higher to cut their losses.
GameStop Corp (GME) 12 months chart
A Wallstreetbets participant described the scheme as: “some play the game to see what could happen”. But as forum members began to see the stock rise sharply, from below $10 dollars to more than $40, more and more people jumped in driving the stock to well above $300 per share in a matter of weeks.
Due to the increased volatility in these stocks, brokerage firms like Robinhood, Interactive Brokers, Webull and others, began restricting trading in GME and AMC. Jaime Rogozinski, Wallstreetbets forum founder, asks “How free exactly is the market?” in an interview with Yahoo finance. Rogozinski is no longer the moderator of the forum but follows it with close attention.
Retail investors who are buying these shares were taking enormous amounts of risk but were using the free markets to buy whatever stocks they wanted. They took advantage of the information in the public domain and “played the game”. With brokerage firms blocking investors from entering positions, I can see why Rogozinski raises the question. However, brokerage firms have clearing restrictions and as volatility increases, so do capital requirements.
This wild event has caused billions of dollars of losses for hedge funds. It serves as an eye-opener to the ways in which market participants and their clout have changed during the pandemic. With increased retail investors in play, a once discounted participant is now a driving force of stock prices.