GME, AMC, BB and Other High Flying Stock Losses
Retail Investors Make Stock Market History
The week of January 25, 2021, saw a remarkable market event where retail investors bid up the price of a handful of stocks in an attempt to force a “short-squeeze” on major Wall Street hedge funds. When an investor “shorts” a stock, which is a bet the stock is going to go down in price, the investor borrows the shares and then sells them at the existing price. If the share price goes down, the investors will “cover” the short by buying at the lower price to return the borrowed shares, capturing the difference between what the investor sold the shares at and the cost to buy the shares back in order to return them. Conversely, if the stock price goes up, the investor has to buy the shares at a high price than what the investor received when they were sold in order to return the borrowed share and loses the difference on the short play.
When shorting a stock, since the investor does not own the stock, the investor’s position is done on margin, that is, using credit from the brokerage firm. As the value of the stock increases, the margin balance increases. In such a situation, an investor can receive a “margin call”, where the brokerage firm forces the investor to close the position. In a margin call from a short position, that means forcing the investor to buy the stock, regardless of the price, which is when there is this short-squeeze.
What Happened With Robinhood and GameStop (GME)?
Reportedly, a sub-Reddit thread Wallstreetbets (r/wallstreetbets) alerted fellow investors that the stock of GameStop Corp. (GME) was being over-shorted and if the members of the thread would go out and buy shares, thus bidding up the price of GameStop, it would create a short-squeeze where the hedge funds who had shorted GME would be forced to buy back the shares, even if the price of GME had no relationship to its actual value. This made the price of GME rise from less than $60 the prior week to almost $400 by January 27, 2021.
The idea was extended to a number of other companies, including AMC Entertainment Holdings, Inc. (AMC), BlackBerry Limited (BB), Nokia Corporation (NOK) and Express, Inc. (EXPR), Bed, Bath & Beyond, Inc. (BBBY) and others.
On January 28, 2021, the incredible volatility in these stocks forced a number of investment platforms to halt trading in these shares and others. Notably, online trading firm Robinhood restricted its investors from entering buy orders for GME and other stocks that were rising as a result of this populist movement. Robinhood reportedly halted the purchase of 13 stocks on its platform.
Many other firms, including Schwab/TD Ameritrade, Webull and even Merrill Lynch followed suit. This effectively shut down the markets for many retail investors, some of whom were trapped in positions or unable to unwind options, and the result was major losses or even margin liquidations.
Retail investors are not the only casualties of these market events. Many of the large short positions were held by hedge funds, some of which have suffered catastrophic losses. Those hedge funds are often owned by pension funds and other large institutional investors. The most notable of this week has been Melvin Capital Management, who reportedly held the largest short position on GME.
Melvin Capital Management has reported that it covered its short positions and had two other major Wall Street players, Citadel LLC and Point72 Asset Management, provide it almost $3 billion in liquidity. Still, those pension funds and other institutional investors collectively could have lost billions as a result of this short-squeeze. Such large investors may have claims against a number of parties, including the hedge funds themselves, advisors who selected the funds or brokerage firms involved.
In addition, Robinhood reportedly receives millions of dollars – as do other firms – in “order flow” payments from a Citadel LLC subsidiary. For Robinhood, this Citadel order flow compensation is reportedly more than 1/3 of Robinhood’s revenue. This has created a lot of concerns given the close ties between the brokerage firms and those financing the hedge funds. This is particularly concerning given the brokerage firms halting trading in shares that were heavily shorted, which could benefit Citadel LLC and others who have invested in these hedge funds. Many are calling it a massive market manipulation that Wall Street has orchestrated at the expense of retail investors.
Contact our Experienced Investment Losses and Fraud Attorneys
If you or someone you know lost money as a result of the market events of the week of January 25th, you can call our investment fraud attorneys at 800-259-9010 for a free, no-obligation consultation to discuss your options. SSEK Law Firm is a nationwide experienced, trusted FINRA Law Firm for Securities and SEC Litigation, and Investment Loss Recovery from Brokerage Firms and Financial Advisors.