Caution urged as Reddit and Musk-fuelled GameStop share frenzy lifts UK stocks

SUDDEN surges in the share prices of Pearson and CineWorld today sparked speculation that effects of a co-ordinated buying frenzy in the US which pushed a down-at-heel video games retailer ‘to the moon’ have rippled across the Atlantic to jolt London markets.

Retail investors have been warned to exercise ‘extreme caution’ before joining any social media-driven pile-ons - with the rocket-fuelled prices set to collapse suddenly as profit-takers simultaneously pull the plug.

GameStop’s shares have risen unaccountably by around 1,000% in the past month - hitting a high of $350 today on the back of an endorsement (“Gamestonk!!”) from Elon Musk. It gives the company a value of $10billion - more than American Airlines. At the end of 2020, shares cost around $19.

Glen Goodman, an author and former BBC correspondent, whose fingers were burned in the original dot-com crash with the similarly-named stock Gameplay, bought into GameStop last year on a whim.

He said: “It’s just a run-of-the-mill company. Who buys physical game discs these days? I didn’t hold out any great hope but at $13 I thought it was a bit undervalued and I might make a few quid.

“When I looked at the value of my share portfolio on Friday, I thought there must be a mistake. For no obvious reason it was at $70 and still climbing. This is a chain of high street video game shops in a world where people are increasingly downloading games. It’s hardly Tesla.”

The roots of the mania were sown in November when Ryan Cohen, the founder of an online pet food store, bought a 13% stake in the 37-year-old company - which saw mass closures and redundancies in 2020 - and publicly lobbied for it to switch to operations online and take on Amazon.

Armchair investors bored from lockdown, fearing inflation, or having missed out on Airbnb, hopped aboard, often using apps like Robinhood to buy in. The trickle became a flood after being picked up and ‘meme’d by Reddit’s WallStreetBets channel - a chatroom with a million subscribers which self-describes as “Like 4Chan found a Bloomberg terminal.”

GameStop’s rising stock price pricked up ears on Wall Street, where professional speculators who think they know a dog when they see one piled in to short the stock to the tune of around $5billion in a bet on the share price crashing.

Except it didn’t.

Instead, the buy-up took on an anti-establishment dimension, pitting a legion of online traders against the might of institutional hedge funds, and so far they are winning. The hedgies were forced to buy in to cover their risk, a so-called short squeeze which only served to send the share price spiralling higher still.

Melvin Capital, a respected firm which manages some $12.5bn in assets, and the smaller Citron Capital have both now closed out their short positions, with Citron’s Andrew Left saying it covered the majority of its GameStop short bets at “a loss of 100%” .

One Reddit user, meanwhile, claims to have turned $50,000 into $23million.

The boom and its repercussions have spread to other heavily-shorted stocks both in the US (Nokia, BlackBerry, AMC) and the UK. This morning Pearson, the education publisher, shot up 17%. CineWorld, another stock which has taken a battering from the pandemic, was also up from a low of 69.2p to just under 90p in a frenzied morning session.

It is unclear whether this is due to a repeat of similarly co-ordinated action by individual traders, or the hedgies themselves buying up stock in advance to stop their fingers being burned.

But the resulting volatility, described by one analyst as “funny things going on in dark corners of the market,” and another as “unnatural, insane, and dangerous” has led to calls for watchdog the Securities and Exchange Commission to intervene.

Neil Wilson, of markets.com, said: “The whole Reddit /wallstreetbets thing clearly needs to be looked at by the SEC because large numbers of retail traders will get hurt.

“We are also seeing some interesting activity in the UK, where heavily shorted shares like Pearson and Cineworld are off to a flyer. It is likely down to short covering as hedge funds back out of their positions. I would think all hedge funds are taking a good hard look at all their short positions and deciding whether they are worth it.

“For retail investors, I would exercise extreme caution.. the price action is proving to be exceptionally volatile.”

James Cox, a professor at Duke University School of Law who focuses on securities regulation told Bloomberg: “It’s an enforcement nightmare for the SEC. The question is: where does the manipulation start and when does trading on your own hunches and publicizing your hunches start?”

Goodman, while more than a few quid to the good, is more forthright: “It’s a crime, a serious crime, a conspiracy by a large number of people to ramp up the price of a stock. The manipulation of securities is against the law and the SEC should step in.

“In the short term, the victims are the billionaire hedge funds shorting the stock, who don’t make very sympathetic victims. But eventually, less experienced traders who don’t really know what they are doing will get sucked in - and they’re the ones who’ll lose everything when the price eventually crashes.”

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