GameStop, AMC shares surge after Reddit users lead chaotic revolt against big Wall Street funds

Shares of video game retailer GameStop and movie theater giant AMC Entertainment soared to astronomical levels Wednesday as an apparent swarm of ordinary investors, spurred on by a Reddit message board, took on big Wall Street funds that had bet the stock prices would fall.

GameStop’s stock prices more than doubled, to $345 a share, or more than 130%. AMC, beleaguered by the coronavirus pandemic and stay-at-home measures, rung in the day by quadrupling to $19 a share.

The frenzy played out amid a decline in the broader market. The Dow Jones industrial average fell more than 630 points, or 2.1%, as investors sorted through a mixed bag of corporate earnings. The broader S&P 500 dropped nearly 99 points, or 2.6%, while the tech-heavy Nasdaq shed about 355 points, or 2.6%.

The GameStop and AMC price surges were so dramatic that trading for both companies was temporarily halted by the stock exchanges to temper volatility. But once trading resumed, prices took off again. TD Ameritrade, a leading trading platform, took the unusual step of attaching restrictions on both stocks, citing "an abundance of caution amid unprecedented market conditions."

The extraordinary trading action, which many analysts linked to a pandemic-related surge in day trading by average investors, seemed disconnected from the companies' financial prospects. GameStop, which sells video game software via a network of bricks-and-mortar retail outlets, has lost money in five of the past six quarters. Revenue in the quarter that ended October was down 31% from the same period one year earlier.

"This is a flash mob with money," said Peter Atwater, an adjunct lecturer of economics at the College of William & Mary.

Newly confirmed Treasury Secretary Janet Yellen and the rest of the Biden administration's economic team are monitoring the matter, White House press secretary Jen Psaki told reporters at a midday briefing. The situation is a "good reminder" that "the stock market is not the only measure of the health of our economy," she said.

Federal Reserve Chair Jerome Powell said he didn't want to comment "on a particular company or day's market activity" during an afternoon news conference. "It's just not really something I would typically comment on."

The inexplicable rise in AMC and GameStop shares has become one of Wall Street's most-watched dramas, pitting an apparent army of retail investors against seasoned traders. Some of the Reddit participants, who had organized in the message board r/wallstreetbets, claimed they were punishing Wall Street and "democratizing" trading. However, the forum does not require members to identify themselves or verify their trades, making it vulnerable to savvy traders.

In a Twitter thread Wednesday, Reddit cofounder Alexis Ohanian said the mood on the message boards was one of retribution against big institutions. “This is an echo of what we’ve seen social media enable the public to challenge institutions for the last decade,” he said, adding “And also — please — don’t invest money you can’t afford to lose, ESPECIALLY, in risky investments.”

For weeks, users posting on WallStreetBets have been rallying support for GameStop, which has been targeted by short sellers as it struggles to adapt its brick-and-mortar business. The apparent group of retail investors began betting that its stock price would rise, challenging Wall Street short sellers wagering the opposite. As the shares rose, the Wall Street traders have been forced to take massive losses.

Among those that appeared to be cheering on the Reddit crowd was Elon Musk, the chief executive of Tesla, who posted "Gamestonk!!" on Twitter with a link to the message board. (Musk has waged his own battles against short sellers, saying in 2018 that "what they do should be illegal.")

"GameStop has become a pyramid scheme," said Michael Pachter, an analyst with Wedbush Securities. Investors buying the stock at $200 are convinced someone else will buy it from them at $250, he said. But that won't last forever, he said.

"Pyramid schemes work as long as new investors believe there will be new investors behind them; when it's clear nobody else is going to come in, they are less likely to participate."

Over the last week, the Reddit board has started putting its support behind AMC, which recently announced it had raised nearly $1 billion to avoid bankruptcy. Its stock price also has jumped.

On the forum, participants who claimed to be ordinary investors celebrated their collective efforts to take down big hedge funds. This week, Melvin Capital, a large hedge fund, needed a $2.75 billion investment after it lost a fortune betting that Gamestop's stock would fall. Instead, purportedly due to the collective trading of the Reddit forum, the share price soared 400% this week.

The Securities and Exchange Commission, which is undergoing a leadership change, declined to comment.

The SEC is likely to investigate potentially illegal manipulation behind the rapid run-up in the share prices, according to James Angel, a finance professor at Georgetown University.

But Angel cautioned that proving wrongdoing could be difficult. "It's going to be hard for the SEC to find blatant manipulation, but they owe it to look," he said. "The normal locker-room chatter you see in these chat rooms is probably not enough to get convictions. But are there bigger players here? We'll see."

To establish manipulation that runs afoul of securities laws, Angel said that regulators will need to prove traders engaged in "an intentional act to push a price away from its fundamental value to seek a profit." In market parlance, this is typically known as a pump-and-dump scheme: Participants buy a stock; artificially inflate its price, say, by circulating rumors about the company; then sell for a profit.

There is no evidence yet of such a strategy behind the surge in GameStock and other stocks, Angel notes. The SEC is likely to examine "who's really moving the market. Is it a bunch of Robinhooders trading ten shares each, or are there larger players out there engaging in a bigger pump-and-dump?" he said.

Traders using a slew of retail brokerage firms experienced service disruptions Wednesday morning, including TD Ameritrade, Robinhood Crypto, E-Trade, Charles Schwab, Fidelity Investments, Vanguard and Interactive Brokers, which several of the firms credited to heightened volume. The website Downdetector reported log-in and website issues for some of the firms, as well as Reddit, starting after 9 a.m. Eastern, with most issues resolved within an hour.

Reddit's message board WallStreetBets also experienced service issues as volunteer moderators briefly set the group to private Wednesday morning to keep up with the morning's frenzy of activity, a company spokeswoman said.

U.S. stocks were dragged down by companies like Boeing and Starbucks — which fell 6.1 and 6.5% respectfully — that reported disappointing earnings Wednesday.

Boeing reported a record $11.9 billion loss for 2020 due to the pandemic and 737 Max scandal — and a loss of $8.4 billion in just the last quarter. "2020 was a year of profound societal and global disruption which significantly constrained our industry. The deep impact of the pandemic on commercial air travel, coupled with the 737 MAX grounding, challenged our results," Boeing president and CEO Dave Calhoun said in a statement. The company's stock was down about 3% during the afternoon.

For Starbucks, its quarter ending Dec. 27, 2020, suffered a nearly 5% drop in revenue to about $6.7 billion, measured by in-store sales, compared to a year ago. The coffee company's shares slid down 5.4%.

The Washington Post’s Hannah Denham contributed to this article.