GameStop rally quashes hedge funds, brings calls for scrutiny

By Sagarika Jaisinghani and Medha Singh

(Reuters) - Shares of GameStop and AMC Entertainment Holdings more than doubled on Wednesday, forcing hedge funds to retreat with heavy losses and sparking calls for scrutiny of social media-driven stock market trading.

Short-seller Citron, a target for some of the individual participants on Reddit's "WallStreetbets" thread who have helped drive gains for several niche stocks in the past week, said in a video post it had abandoned its bet on GameStop shares falling after the video game retailer's value soared almost tenfold in a fortnight.

With commentators and lawyers calling for scrutiny of the moves, Nasdaq chief Adena Friedman said exchanges and regulators needed to pay attention to the potential for "pump and dump" schemes driven by chatter on social media.

"If we see a significant rise in the chatter on social media … and we also match that up against unusual trading activity, we will potentially halt that stock to allow ourselves to investigate the situation," Friedman said, asked on CNBC about the issue after the exchange's annual financial results.

"If we do think or contemplate that there may be some manipulation, we then engage with FINRA and the SEC to evaluate and investigate that."

The Securities and Exchange Commission (SEC) declined to comment. Gamestop and AMC are both listed on the New York Stock Exchange.

Mainstream commentators have questioned the justification of moves in several Reddit-hyped stocks in recent days, at a time when some on Wall Street are wondering if months of stellar overall gains have driven shares more generally into bubble territory.

GameStop's stock has surged nearly 700% in the past two weeks, upping the struggling video retailer's market value from $1.24 billion to more than $10 billion. BlackBerry Ltd was up 185% as of Tuesday's close and on course for its best month ever.

GameStop surged another 103% to $289.09 in early deals on Wednesday, while AMC's stock more than doubled to $12.34 at a time when the broader stock market was down more than 1%.

Along with Nokia Oyj, the companies were among the most heavily traded stocks, with Reddit discussion threads again humming with chatter about the stocks.

"These are not normal times and while the (Reddit) ... thing is fascinating to watch, I can't help but think that this is unlikely to end well for someone," Deutsche Bank strategist Jim Reid said.

ROBIN HOOD

Easy access apps like Robinhood.com, which allow ordinary Americans to make stock market trades at almost no initial cost, have spurred a boom in direct investment over the past year as trillions of dollars in official stimulus drove markets higher.

On GameStop, the retail army have pitched themselves against some of the institutional short-sellers - a traditional area for hedge funds - who promote and bet on falls in companies they judge as weak.

The 20 small-cap Russell 2000 index companies with the biggest bearish bets against them have risen 60% on average so far this year, easily outperforming the rest of the market, a Reuters analysis of Refinitiv data shows.

Early on Tuesday, short sellers in GameStop were down $5 billion on a mark-to-market, net-of-financing basis in 2021, according to analytics firm S3 Partners.

Another fund, Melvin Capital, said it had closed out its short position in GameStop on Tuesday afternoon after taking a huge loss.

Barron's reported late on Tuesday that the top securities regulator in Massachusetts believes trading in GameStop stock suggests there is something "systemically wrong" with the options trading around the stock.

Others say that the trades are at the end of the day up to the investors who make them.

"That's the sentiment, the public doing what they feel has been done to them by institutions," Reddit co-founder Alexis Ohanian said in a tweet on Wednesday.

"This is an echo of what we've seen social media enable the public to challenge institutions for the last decade."

Smallcap index outperforms S&P 500 https://fingfx.thomsonreuters.com/gfx/buzz/rlgvdgqqepo/Pasted%20image%201611745423311.png

CBOE https://fingfx.thomsonreuters.com/gfx/mkt/oakpeyjlepr/CBOE.JPG

(Reporting by Sagarika Jaisinghani and Medha Singh in Bengaluru; additional reporting by Sruthi Shankar, Ambar Warrick and Aaron Saldanha in Bengaluru and Thyagaraju Adinarayan in London; editing by Patrick Graham)