Markets latest: Brokers step in to limit traders as Redditors shake up equities

Markets latest: Brokers step in to limit traders as Redditors shake up equities

Adam Samson in London

Shares in GameStop, the company at the centre of a tussle between individual investors and hedge funds, have shot 85 per cent higher from the low hit just after the Wall Street opening bell.

The company’s shares traded as high as $483 in tumultuous trading, having hit a trough of $261.52 just thirty minutes earlier. The volatile moves triggered three pauses meant to smooth hectic trading in a period of roughly half an hour, NYSE data show.

Thursday’s dramatic moves illustrate why several brokers have moved to curb trading of shares of smaller companies that have high levels of so-called short interest, or bets often made by hedge funds that their stock prices will fall. Individual investors have launched a multi-day barrage of buying in these companies using tools such as options that has sent their shares soaring.

Neil Hume and Henry Sanderson

Shares in silver miners and exchange-traded funds backed by the precious metal ripped higher on Thursday as the Reddit army of day traders turned their attention to producers of the volatile precious metal.

Fresnillo, the Mexico-focused miner that was hammered a day earlier following a disappointing trading update, rallied as much as 10 per cent to secure the top spot in the FTSE 100 performance chart.

Meanwhile, shares in Hochschild Mining, which has operations in Peru and Argentina, climbed 7 per cent to become the biggest riser in the FTSE 250 index. Those in Canada-based First Majestic Silver, which operates in Mexico, rose by 29 per cent on the New York Stock Exchange.

The price rise was not limited to miners. Shares in the world’s largest silver-backed ETF, the iShares Silver Trust, rose by 6 per cent after a user in Reddit’s WallStreetBets forum urged people to buy shares and call options.

The user u/TheHappyHawaiian said buying shares in the ETF would “force physical delivery of silver” into its vaults, thereby causing a “short squeeze” on the market. That pushed up the silver price. That would present problems for traders who were short silver on the futures markets, they said.

“The people naked shorting silver via the futures markets are a couple of large banks and making them pay dearly for their over leveraged naked shorts would be incredible,” the user said.

Still, Ross Norman, a veteran precious metals trader, said the large banks used futures contracts to hedge their physical holdings of silver, so they were not “naked shorts”.

“There is a misnomer here that banks are constantly running short positions, but from a price perspective they are neutral, they have a long and a short that cancels each other out,” he said. “It’s a fools’ errand, it’s financial anarchy, somebody is going to get hurt.”

The iShares Silver Trust is backed by physical holdings of silver with current holdings of 17,787.58 ounces, according to its website.

Silver prices rose by 5 per cent on Thursday to $27 an ounce.

Katie Martin

The Reddit investing frenzy has certainly got Wall Street’s attention.

UBS points out that its “high short interest basket”, a collection of stocks that are targets of substantial negative bets, jumped nearly 14 per cent on Wednesday.

That shows the power of the Redditor crowd’s appetite for buying stocks out of favour with hedge funds, but it also indicates how quickly hedge funds are getting out of shorts before they get squashed by the Redditors, as my colleagues addressed in an interesting piece overnight. They are running scared. This basket of stocks is up some 32 per cent since January 21.

This has all spooked the Vix, a measure of expected volatility in US stocks, sending it above 36 points on Thursday from around 23 in the previous session.

“To put that move in perspective,” UBS says, “it was the sixth-largest one-day Vix move since 1990, and nine points larger than expected when the S&P 500 falls 2 per cent.” Safe to say the establishment is rattled.

On that note, choose your side.

In his note on Thursday, Albert Edwards, SocGen’s permabear, lashes out at the “extreme speculative excess”.

“The madness has now taken a novel twist with a new warrior class of retail investor roaming the equity savannah. This loosely organised retail mob is gaining strength feasting off each hedge fund kill. Intoxicated with success, they will seek out bigger and more powerful prey. This farce is of the Fed’s creation, which should hang its head in shame.”

Taking the other side is former hedge fund manager Mike Novogratz, who told CNBC “it’s shocking how angry… There’s a nihilism going on out there. People are crying out for system change. This is millennials and Gen Z screaming at boomers and saying ‘you screwed up our planet, you screwed up our economics, you screwed up our future, and screw you’.”

More on that attitude in my column here.

Philip Stafford in London, Alice Kantor in Paris and Leo Lewis in Tokyo

The battle between amateur investors and hedge funds pushed trading volumes on Wall Street past a peak set at the height of the financial crisis in 2008.

More than 24bn shares changed hands in the US on Wednesday, exceeding the high in October 2008, according to data from FactSet.

That was matched by a record 57m options contracts traded, surpassing the 48m record set at the onset of the pandemic, data from clearing house Options Clearing Corp showed.

The trading boom is the latest sign of how day traders, equipped with commission-free apps, are wielding a growing influence over global financial markets and forcing professional investors including hedge funds into retreat. 

Membership of Reddit’s r/WallStreetBets community, where amateur investors gather and share tips, has exploded in recent days. Between Wednesday and Thursday this week, the number of users rose from 2.8m to 4.3m, with about 316,000 people announcing on the platform that they were buying options, up from a little more than 60,000 on Wednesday.

Read more from this article and others in the FT’s Runaway Markets series

Arash Massoudi

Morgan Stanley chief executive James Gorman said the new phenomenon shaking up markets will not last.

Speaking at the Saudi Arabia-based Future Investment Initiative event Mr Gorman said: “This short-term phenomenon of all these people getting together on talks sites like Reddit and coordinating a market response…that won’t last.”

“All you need is a correction…and these people are in for a rude awakening…that will happen and this will pass.”

Robin Wigglesworth

Steve Cohen’s Point72 and Dan Sundheim’s D1 Capital Partners, two of Wall Street’s largest and most powerful hedge funds, are reeling from losses of 15 per cent and 20 per cent respectively this year, after some of their bets were mauled by day traders.

Point72’s losses mostly stem from its exposure to Melvin Capital, a hedge fund that found itself squarely in the crosshairs of retail traders that populate Reddit’s WallStreetBets forum, due to its big short position on GameStop.

Mr Sundheim – who manages about $20bn at D1 – was mainly reeling from the huge rise in AMC Entertainment Holding, which blew up his bet against the struggling cinema operator, according to a person familiar with the matter.

That even two of the industry’s biggest names have been wrong-footed by the social media-fuelled day trader insurgency underscores how the phenomenon is rippling through markets.

An exchange-traded fund managed by Goldman Sachs that buys the most popular hedge fund bets tumbled 4.3 per cent on Wednesday – its worst daily performance since September – and is heading for its worst monthly performance since the depths of the coronavirus crisis in March. In contrast, a Goldman index that tracks the biggest short bets has actually climbed this year.

Claire Bushey and Alice Kantor

American Airlines has said it plans to seek new financing as it posted an $8.9bn net loss for the year and expects to burn cash until demand for air travel recovers.

Despite this, American’s stock rose more than 40 per cent at one point in pre-market trading, before trimming those gains to trade 27 per cent higher. A day earlier, retail investors on Reddit’s r/wallstreetbets community had identified the airline, which has been shorted by many investors, as the next company in which they might invest.

Some of those investors said on the forum that the company’s stock is most likely going to get pushed today. “It’s AAL time boys, let’s fly high!!!” wrote one user.

Reddit investors have brought about a massive spike in the stock price of video game retailer GameStop this month, forcing some hedge funds to withdraw from their short positions. During a call with investors, Doug Parker, American’s chief executive, declined to comment on the move.

The Fort Worth, Texas-based airline on Thursday said it reduced its cash burn to $30m a day in the fourth quarter, down from $44m in the previous quarter and nearly $100m in April, when US airlines suffered the worst drop in passenger volumes. It ended the fourth quarter with $14.3bn in liquidity and expects to have $15bn in two months.

American said it would try to issue secured and unsecured debt securities, equity securities and pursue credit facilities.

Airlines worldwide have been hit hard by the covid-19 pandemic. Government travel restrictions and people’s fear of contagion have caused traffic levels and revenue to plummet.

American said it expected first-quarter revenue to fall 60 to 65 per cent compared with the first quarter of 2019, which would place it between $6.4bn and $6.9bn.

Madison Darbyshire

Retail investment brokerages are limiting trades and raising margin requirements to protect clients as well as platform integrity, as trading in highly volatile shares in Gamestop and AMC continue to rise.

Robinhood, the retail investment platform that has become synonymous with the rise of the retail trader in 2020, moved margin requirements for GameStop and AMC to 100 per cent in order to protect customers. The platform does not allow shorting of equities, or naked options trading.

The flash rally prompted established brokers to put protections in place for investors. Out of “an abundance of caution”, TD Ameritrade and its new owner Charles Schwab have both placed restrictions on short sales for Gamestop and AMC, as well as on margin requirements for certain trades, the companies said.

“It is not uncommon … to place restrictions on some transactions in certain securities in the interest of helping mitigate risks for our clients,” Schwab said.

Interactive Brokers restricted investors from putting on new trades in GameStop.

“It’s affecting risk management,” said Steve Sosnick – chief strategist Interactive Brokers. “We’ve had discussions as to how to manage our risks as brokers– we have to be cognisant of our customers’ risk, particularly those who are using margin. We are having conversations about this now.”

Matthew Rocco

US stock futures climbed on Thursday even as data showed the rate of the US economy’s rebound from the coronavirus-fuelled downturn slowed in the fourth quarter, weighed down by a deadly surge of cases over the holiday season.

Gross domestic product advanced 4 per cent on an annualised basis, according to figures published on Thursday by the US commerce department. Economic output advanced 1 per cent compared with the previous quarter, based on the measure used by other major economies.

Economists had expected the US economy to advance by an annualised 4 per cent, following a 33.4 per cent rise in the third quarter, the strongest annual rate of growth in postwar history.

The US has proven to be one of the more resilient economies in the face of unprecedented shutdowns during the pandemic. Annual GDP will eclipse its level from the end of 2019 around the middle of this year, the IMF estimated this week. The group also raised its US growth forecast for 2021 by two percentage points to 5.1 per cent.

But a resurgence of coronavirus, which prompted a new round of tighter restrictions in some parts of the country, weighed on business activity during the final stretch of 2020 and has kept the labour market on unsteady footing while the rollout of coronavirus vaccines ramps up.

New US jobless claims fell last week but remained historically elevated at 847,000, compared with 914,000 in the previous week.

Futures for the benchmark S&P 500 rose 0.3 per cent. Nasdaq futures trimmed their losses to trade down 0.2 per cent.

Joe Rennison, Alice Hancock and Robert Smith in London, and Sujeet Indap in New York

The Reddit army of day traders has handed gains worth hundreds of millions of dollars to two big-name creditors of struggling cinema operator AMC Entertainment, after the investment firms swapped risky debt for equity that has skyrocketed in value.

The stock price of AMC, the world’s largest cinema operator, soared 300 per cent to $19.90 on Wednesday, as individual investors drove up the price of the stock. That exceeded the trigger price on $600m of convertible bonds held by Silver Lake Group. The firm has now swapped the debt — which paid interest of 2.95 per cent — into AMC stock at a price of $13.51, according to regulatory filings.

At Wednesday’s closing value, Silver Lake’s stock holding was already worth more than $880m. “Silver Lake has made the trade of a lifetime thanks to the basement bandits,” said one credit hedge fund manager.

Earlier this month, Mudrick Capital Management also swapped AMC debt for equity. The investment firm exchanged $100m in debt for close to 14m shares, which are now worth $273m.

In addition, Mudrick lent the cinema operator a further $100m at an annual interest rate of 15 per cent. As a fee for committing to the deal in December, it also received another 8m shares, which are now worth $164m. The investor was already one of AMC’s largest shareholders.

Frenzied trading in AMC, GameStop and other shares over recent days has been sparked by individual investors corralling together through social media networks such as Reddit. The windfall profits for AMC’s backers stand in contrast to some of the anti-establishment messaging from the day traders, who have forced hedge funds to back away from their bets against struggling companies. 

Read more here.

Adam Samson in London

An army of individual investors is wielding growing influence across global financial markets, causing ructions in share prices and prompting hedge funds to take cover.

The dramatic moves in markets of recent days underscore how these traders, a mix of have-a-go punters and more sophisticated players, are able to exert influence by using low-cost trading platforms like Robinhood and tools such as options.

We’ll bring you the details of what you need to know on this live coverage page. In the meantime, here are a few key stories:

US stock trading volumes soar past 2008 peak in Reddit battle

Hedge funds retreat in face of day-trader onslaught

Markets Insight: Occupy Wall Street spirit returns as traders upset the elites

More on this year’s Runaway Markets here

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