Wild Wall Street: Five things to know about US stock volatility

Shares bid up by retail traders plunge after brokerages rein in excesses

The Fearless Girl statue stands in front of the New York Stock Exchange. The volatility in U.S. stocks is the product of a faceoff between retail investors and hedge funds.   © Reuters

TATSUYA GOTO and KAORI YOSHIDA, Nikkei staff writers

January 29, 2021 05:06 JSTUpdated on January 29, 2021 07:09 JST

NEW YORK -- Stock trades that seem to defy investor logic have roiled the U.S. equities market in recent days, reflecting the growth of a new variable: social-media-powered day traders.

These moves are seen by some as risky speculation and by others as a social crusade against the rich and powerful. Now, brokerages are moving to tamp down some of the excesses.

Here are five things to know.

What is happening?

Retail investors, joining forces through Reddit's wallstreetbets online forum, have thrown out the market rulebook by bidding up shares in struggling companies.

Brick-and-mortar video game retailer GameStop, the stock at the heart of the phenomenon, gained 93% on Tuesday, then another 135% on Wednesday. Roughly $30 billion worth of the shares changed hands on Wednesday, topping Apple's $20 billion volume.

By driving up the prices of depressed stocks, some traders are trying to inflict losses on hedge funds that bet against these companies by short-selling, according to online posts.

Some of the most-bid-up shares plunged Thursday on trading restrictions imposed by brokerages. GameStop shares closed down more than 40%.

The frenzy reflects increased participation in the stock market by retail investors for months now. Retail investors accounted for 19.5% of U.S. equity market flows in 2020, up 4.6 points from 2019 and 9.4 points from 2010, shows data from UBS Global Wealth Management. A new round of economic stimulus payments in recent weeks is believed to be fueling some of these bets.

A GameStop store in New York: The chain has struggled in recent years as more customers purchase video games and consoles online.   © Reuters

How have brokerages and authorities reacted?

Online trading platform Robinhood, whose growth has been fueled by an influx of new investors during the pandemic, has moved to rein in some of this activity.

New trades in selected highly volatile issues, including GameStop and movie theater operator AMC Entertainment Holdings, have been halted except for position-closing by existing holders. Margin requirements have been raised for certain securities, meaning that traders have to stake more of their own money to bet on stocks.

Interactive Brokers and TD Ameritrade have announced similar restrictions on trades.

Robinhood's move has raised ire, with U.S. congresswoman Alexandria Ocasio-Cortez -- a prominent critic of Wall Street -- on Thursday calling it "unacceptable." This sentiment won the Democrat a rare supporter -- Republican Sen. Ted Cruz, who tweeted: "Totally agree."

Sen. Sherrod Brown, the incoming chairman of the Senate Banking Committee, tweeted Thursday that he plans to call "a hearing on the current state of the stock market."

The Biden administration is "monitoring the situation," White House press secretary Jen Psaki told reporters Wednesday.

"We are aware of and actively monitoring the on-going market volatility in the options and equities markets," the U.S. Securities and Exchange Commission said in a statement that day.

What other stocks have been swept up in this activity?

Audio equipment maker Koss was also bid up to dizzying heights in recent weeks. Its shares fell 27% in Thursday's market.

Apparel company Express, mobile phone maker Blackberry and retailer Bed Bath & Beyond suffered even steeper declines after riding high on unexpected waves of buying.

Is this confined to the U.S.?

The rise of retail investors is not a uniquely American phenomenon.

In China, where retail players have traditionally been a key force in the market, the focus is turning to Hong Kong. More than 10 billion Hong Kong dollars ($1.29 billion) flowed into the territory through its stock connect with the mainland for a 19th straight session on Thursday. Much of the funds went to well-known Chinese companies with no mainland listings, such as Tencent Holdings and Meituan.

Japanese investors have stepped up online trading. Matsui Securities logged a roughly 30% increase in customers conducting more than 100 trades in a month. Initial public offerings and bio-related ventures are among their top targets.

As the battle between retail investors and hedge funds grow, the latter may eventually be forced to offload assets to make up for losses. "This could lead to declines in a wide range of assets and turmoil in the financial markets," said Takahide Kiuchi, executive economist at the Nomura Research Institute and former Bank of Japan policy board member.

Have financial institutions suffered losses?

Hedge fund Melvin Capital, a target of attack by some on Reddit, has suffered heavy trading losses this month. Two bigger funds have agreed to pump $2.75 billion into Melvin in support of the firm, the Financial Times reports.

But others have received a windfall. AMC's share price surge has allowed financial firm Silver Lake Group to convert some debt to equity, the FT reports. At Wednesday's closing price, Silver Lake's AMC holdings were worth more than $880 million, according to the newspaper.

Additional reporting by Yusho Cho in Shanghai and Taizo Wada in Tokyo.