Earlier this week a surge in trading for US based company GameStop caused a stir as retail investors caused billions in losses for a well-known hedge fund.
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The surge has also led to questions about the power of wall street brokerage firms with everyday investors blocked from trading GameStop and other entertainment company stock - while hedge funds were allowed to continue.
Here's what happened.
Earlier this week members of Wallstreetbets, which has more than 4.5 million members on social networking site Reddit, noticed that a hedge fund had taken a massive short position against GameStop stock. The users suggested that members of the group buy the stock which was trading at a relatively low price.
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Taking a short position essentially means betting that the price of the stock will fall. When you take a short you sell shares in a company - which is usually borrowed from someone else - then aim to repurchase it at a lower price. You then return the shares you borrowed and keep the profit margin.
What happened in the case of GameStop was that retail investors kept buying shares which caused the price of the shares to go up. This means that people who have taken short positions were now losing money. Melvin Capital, a $13 billion hedge fund, was forced to close its short position and accept huge losses due to the surge in retail trading.
Following the surge in spending on GameStop, and the apparent success of the operation, people started buying up stocks of the most shorted companies across global stock markets. - including Tasmanian fish farming company Tassal.
Tassal had about 12.4 per cent of its shares shorted but closed up 10 cents on Thursday. The price has continued to grow 1 per cent so far on Friday. Other heavily shorted Australian companies are also experiencing a surge in trading - including Ingrams and Avita.
Tasmanian Economist Saul Eslake said there were two possible consequences of this kind of investment behaviour.
One was that unsophisticated investors could potentially lose lots of money and if it were found that market manipulation was occurring it could impact the confidence of legitimate investors, which would have a flow on effect to the wider market - including Australian Super funds.
Mr Eslake was not suggesting market manipulation had occurred in this example.
What's next?
University of New South Wales Deputy Head of School James Doran, who specialises in derivatives, asset pricing, and financial risk management, said it had been an exciting two weeks for market watchers but it was likely to end soon, in a piece published on the Conversation.
With Melvin Capital closing out it's short position in GameStop shares the arbitrary purchasing of the stock is likely to stop in coming days. Although the price of the stock continued to rise in early trading on Friday it soon began to plummeted as trading platforms limited trading on highly active stocks - including GameStop.
"What's next? With the short sellers removed from the game, the reality of the company's business prospects may reassert themselves," Professor Doran wrote.
"The past two weeks have been exciting times for market watchers. But we cannot ignore the apparent ease with which these stocks have been manipulated, and the possibility of more market manipulation in the future."
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