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"GameStop effect" could ripple further as Wall Street eyes short squeeze candidates

TechnologyJan 28, 2021 10:25PM ET
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2/2 © Reuters. FILE PHOTO: A GameStop sign is pictured in Pasadena, California 2/2

By April Joyner and Saqib Iqbal Ahmed

NEW YORK (Reuters) - The clash between retail traders and Wall Street professionals that sparked roller coaster rides in the shares of GameStop Corp (NYSE:GME) may pose a risk to dozens of other stocks and potentially create a headache for the broader market, analysts said.

Market watchers identified dozens of stocks potentially vulnerable to extreme volatility after a buying spree from an army of retail traders in recent days prompted hedge funds to unwind their bets against GameStop and other companies, fueling surges in their share prices in a phenomenon known as a "short squeeze."

"Unfortunately, it's definitely not a one-off thing," said Randy Frederick, vice president of trading and derivatives at the Schwab Center for Financial Research. "The type of activity that drove that higher, I believe, has caused people to try to duplicate that in other names."

J.P. Morgan earlier this week named 45 stocks that may be susceptible to short squeezes and similar "fragility events," including real estate company Macerich Co (NYSE:MAC), restaurant chain Cheesecake Factory (NASDAQ:CAKE) Inc and clothing subscription service Stitch Fix (NASDAQ:SFIX) Inc.

Like GameStop, American Airlines (NASDAQ:AAL) Group Inc, AMC Entertainment (NYSE:AMC) Holdings Inc and others that have recently become targets of retail traders in recent days, all the stocks have high short interest ratios.

That means a large percentage of investors have borrowed the stock to sell it in anticipation that they will be able to buy it back at a lower price and profit on the trade. But if the stock rises sharply, those investors may be forced to buy back the stock at a loss.

"The unfortunate events in GameStop this week may be building a dangerous precedent for markets whereby retail investors act en masse to leverage their buying powers to spark fragility events," analysts at J.P. Morgan said in a note.

Using derivatives and coordinating buying on websites such as the Reddit forum wallstreetbets, retail investors have had an outsize impact on markets in recent months. Hedge funds Melvin Capital Management and Citron Capital closed out short positions in GameStop earlier this week after buying pressure pushed up the company's shares.

GameStop shares were recently down 25% on Thursday as retail brokerages Robinhood Markets Inc and Interactive Brokers (NASDAQ:IBKR) Inc, restricted purchases of the stock, along with several others that have catapulted in recent days, including AMC Entertainment Group Inc and BlackBerry (NYSE:BB) Ltd.. Even so, the video game retailer's shares have gained more than 500% since last Thursday.

Barring wider trading restrictions, similar patterns could play out over several weeks as short sellers unwind their bets, said Michael Purves, chief executive of Tallbacken Capital Advisors.

Some firms run strategies that involve holding both long and short positions on a stock, he said, and as a result, certain stocks could see a surge and then a sharp drop as those firms adjust their positions. That process could put pressure on stocks more broadly and contribute to market volatility.

"I do think the contagion risk is real," Purves said. "Any stock that is heavily shorted is exposed to getting GameStopped."

"GameStop effect" could ripple further as Wall Street eyes short squeeze candidates
 

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Comments (18)
Joe Blow
Joe Blow Jan 29, 2021 9:28AM ET
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So shorting a stock is ok to ********a company, but getting together and buying the stock is bad. I hope the hedge funds go out of business.
TL Chan
TL Chan Jan 29, 2021 12:26AM ET
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Agree, it match the past "criminal record" of MSFT,.like setting up the CCP internet wall with Cisco 20+ years ago , to hurt the Chinese people!
Mark Henline
Mark Henline Jan 29, 2021 12:17AM ET
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https://arstechnica.com/gaming/2020/10/microsoft-will-give-gamestop-a-share-of-xboxs-digital-revenues/
Mark Henline
Mark Henline Jan 29, 2021 12:10AM ET
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msft. was behind gme platform.Xbox platform and streaming.what a way to launch an ipo synergy play...big scams no one can even see ..no one even talking about corrupt large cap
Mark Henline
Mark Henline Jan 29, 2021 12:06AM ET
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great way for biden and regulation to waltz in and make rules...government scaming the scamers... all fake set up its exactly what they want...
Michael Mcfaul
Michael Mcfaul Jan 28, 2021 11:49PM ET
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Awwwww. Poor wall street babies need a whambulance. Carvana is a good target for a short squeeze.
Jo Doe
Jo Doe Jan 28, 2021 11:49PM ET
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Institutional cumulative wealth of hedge funds will remain robust long after this feud is over. They may have lost the GME battle, but not the war.
Troy Coureton
Troy Coureton Jan 28, 2021 11:04PM ET
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Thats right! And dont forget it. We are coming for you market manipulating cucks.
Alexander burrus
Alexander burrus Jan 28, 2021 10:49PM ET
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robinhood should be sued and abandoned interfering on hedge funds behalf! think of an individual by puts and get wiped out no one anywhere sores anything for them, but the hedge funds get special treatment and artificial unfair protection. I would never buy GME, but robinhood should let it play out.
Rob Fordham
Rob Fordham Jan 28, 2021 10:42PM ET
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Is this good for mom and pop it? They have etfs that are getting hurt cause market is down cause these funds have to sell to cover basically its hurting everybody and could kick off something worse
Ross Dre
Ross Dre Jan 28, 2021 10:42PM ET
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Exaclty right, Rob. The only ones that really benefit... WSB retail that sell out early. It only causes retail to suffer terribly
Benjamin McIntire
Benjamin McIntire Jan 28, 2021 10:42PM ET
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Lmao that isnt how this works at all. Hedge funds arent etfs. Anyone in a SPY etf wont feel a thing from this little bit of drama.
Rodolfo Barraco
Rodolfo Barraco Jan 28, 2021 10:30PM ET
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American airlines will “take off” tomorrow. Dont miss your flight
Anthony Spencer
Anthony Spencer Jan 28, 2021 3:42PM ET
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Does this seem like "Fight Club" to anyone else?
Anthony Spencer
Anthony Spencer Jan 28, 2021 3:39PM ET
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Greedy, Evil, Hypocrites have started a war. Now they'll try to punish the revolters. Like fascists do... What if the people withdrew all their cash from the banks and refused to take loans? The bankers and hedges would crumble. 💯
Jose Mibaresh
Jose Mibaresh Jan 28, 2021 3:39PM ET
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just buy gme
Joanna Yin
Joanna Yin Jan 28, 2021 3:30PM ET
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another crisis is coming
Lester Burnham
shib Jan 28, 2021 3:23PM ET
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jp morgan should be worried about the biggest short squeeze that is silver. especially when it's jp morgan getting squeezed
nemo me impune lacessit
nemo me impune lacessit Jan 28, 2021 3:23PM ET
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Crazy you said that.  There was someone on r/wallstreetbets pointing this out.  Stating that the biggest squeeze ever remained in SLV.  Hmmmmmm
Javier Escamilla
Javier Escamilla Jan 28, 2021 3:21PM ET
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It is a very fixable “issue” just ask hedge funds to keep taking advantage of retail by over shorting. So dont blame the players blame the ones that created it (hedge funds)
Jack Zhang
Jack_A Jan 28, 2021 3:20PM ET
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only allow Wall Street loot retailers?!!!
Brandon Wooton
Brandon Wooton Jan 28, 2021 2:17PM ET
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i have never seen such fraudulent action by the powers that be, displayed in broad daylight, in favor of select market players. usually these disgusting antics go on behind closed doors in hushed whispers... this was a stunning display of fascism.
nemo me impune lacessit
nemo me impune lacessit Jan 28, 2021 2:17PM ET
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I agree. Today we saw wanton display of power and flippancy towards the little man.  This is the "do as I say" if you know what's good for you crowd.  They're simply outnumbered and lashing out, as great fortunes are being wiped away.  The funny thing is, hubris is what's brought this about.  They've gotten away with (illegal) naked shorts for so long, they forgot it was 1) illegal 2) not their right.  Somewhere in the back of someone's mind they knew this day was coming, yet still failed to react as they were Pavlovian in their response as its been that long.  Time to pay the piper, and I do mean literally.
Casador Del Oso
Casador Del Oso Jan 28, 2021 1:53PM ET
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You can sell but you just can't buy.
Paul Brosam III
Paul Brosam III Jan 28, 2021 1:53PM ET
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System is rigged for the wealthy. Been like that for a while.
Don Getty
Don Getty Jan 28, 2021 1:53PM ET
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class actions already happening - not to mention pol's investigating - w/biden gov - this will lead to new regs!
 
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