GameStop (GME) plunges 40%, short squeeze effect fades

GameStop Store U.S.
GameStop Store U.S.

Since the start of 2021, GameStop (NASDAQ: GME) soared 1,500%. The surge was driven by a Reddit message board called WallStreetBets. GameStop stock reached a record-breaking $483. However, the rally was disrupted first by a 31% in Monday’s trading session and followed a 40% plunge on Tuesday.

The disruption was due to the short-squeeze effect fading. GME fell 40% the second decrease in a one week period. The stock price lost 31% on Monday and GME lost a total of 73% as of this writing. Furthermore, several stocks that were gaining momentum in January plunged. AMC — the movie-theater chain fell 31% while BlackBerry and Bed Bath and Beyond shed 42% and 36%, respectively.

Several financial firms wanted to profit from short-selling GME but were surprised by the Redditers counter-attack. Consequently, due to the battle between bulls and short-sellers, GME was paving its way to an all-time high price. GameStop rally resulted in heavy losses to hedge funds and Wall Street traders. Melvin Capital, one of the company’s that made a bet against GameStop was down 53% in January. The firm hit with a $4.5 billion fall in assets.

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Meanwhile, some traders believe that the GME short-squeeze can have tough consequences on traders. Jordan Belfort, famous as the “The Wolf Of Wall Street” warned traders and said that investing in GME can be risky.

Belfort told BBC on Tuesday, “You must be so careful because eventually these stocks are going to come crashing back down to earth, as will silver. If you are looking at this as a way to make your living, you’ll have to catch a falling knife on the way down. I would urge people to take their chips off the table.”

Did Brokerages disadvantage GME traders?

In conjunction with GME and AMC rally, many brokerages such as Robinhood and IG were restricting trading in the stock. Consequently, many traders raised questions on whether exchanges are favoring hedge funds and Wall Street traders by restricting opening positions in GME and other soaring stocks. Elon Musk, billionaire and CEO of Tesla (NASDAQ: TSLA) questioned Robinhood’s CEO Vladimir Tenev, Musk described the restrictions as shady.

On the other hand, IG — the UK’s largest brokerage said that they restricted trading in GME and other stocks “ due to extreme volatility”. Meanwhile, Robinhood’s CEO said that the NCSS ordered Robinhood to secure $3 billion to fund the trading. However, traders didn’t accept the move and requested the SEC to open an investigation.

In conclusion, The Securities and Exchange Commission (SEC) said that it will investigate the online brokerages actions to see if there is any manipulative behavior.

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