GameStop Corp. plummeted, snapping a dizzying six-day rally and wiping out nearly $11 billion in market value after brokerages choked off demand for the stock by curbing trading on the apps used by the company’s zealous fan base.
The stock plunged 44% Thursday after Robinhood Markets, Interactive Brokers Group Inc. and others took steps to curtail activity in several high-flying stocks, including GameStop and AMC Entertainment Holdings Inc. E*Trade Financial is preventing customers from purchasing shares of both firms, according to a person familiar with the matter.
GameStop shares jumped in extended trading after Robinhood plans to allow limited buying of certain securities on Friday. “We’re beginning to open up trading for some of these securities in a responsible manner,” the firm said in a statement. Gamestop rose 46% in post market trading, while AMC climbed 29%.
The video-game retailer’s 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.
The 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 criticize 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 Ltd. that have surged this week, burning short sellers and hedge funds. The phenomenon attracted the attention of regulators 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 Inc. 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.
For a brief moment Thursday morning, GameStop became the biggest stock on the Russell 2000, taking over from Plug Power Inc. The video-game retailer has advanced more than 900% this year, fueling 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 $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 U.S. session, in which the stock rose 135%. Gains were briefly pared postmarket after the Reddit page that has fueled 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 Wallstreetbets New topped 350,000 members.
“This will burn itself out, like any other mania, but there will likely 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% move in the S&P since March shows there’s plenty of room for a pullback.”
GameStop shares would be worth $125.75 in a best-case scenario, compared to its close of $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.