Speculations fuel GameStop shares robust growth

Photo: EPA

Record gains in shares of GameStop and some stocks, this week opened the Pandora box of populist market revolts, Reuters reported. Many investors have not yet realized their profits by selling shares, and some platforms could later face disillusioned retail customers who bought into the rally too late.

How does a small retail company that sells video games, worth less than $400m in the middle of 2020, become a $10bn company in less than six months?

GameStop stocks have surged from below $20 earlier this month to close around $350 as a volunteer army of investors on social media challenged big institutions who had placed market bets that the stock would fall.  

The surge in the use of stock options fueled by individual investors has made some brokerages nervous and explains why some have taken steps to restrict trading. Trading platform Robinhood said that investors would only be able to sell their positions and not open new ones in some cases. Robinhood also required investors to put up more of their own money for certain trades instead of using borrowed funds.

But among those out ahead are some of Wall Street’s largest asset managers, which can realize gains both from their share stakes and from lending out stocks to short sellers.

Shares of GameStop and other heavily shorted stocks such as AMC Entertainment and BlackBerry shot up this week as they were pushed by traders on Reddit and other social media platforms.

Hedge funds betting against the stocks were forced to cover their positions, costing them billions of dollars and adding fuel to the rally. Big asset managers would also have benefited from lending securities to short-sellers and others. Such activity generated $7.66bn in revenue globally in 2020 according to DataLend.

As the price of GameStop rose so has the cost of borrowing its shares, partly as higher trading volumes made the shares harder to locate. Borrowers of GameStop now pay around 30% on an annualized basis, less than earlier this week but up from around 7% in early December.

Other beneficiaries of this week’s rally was private equity firm Silver Lake, which took advantage of a 301% surge in struggling movie theater chain AMC’s shares on Wednesday to convert $600m in convertible notes into AMC shares.

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