A “short squeeze” that started on Wall Street swept across the globe on Wednesday, triggering another day of frenetic moves in the share prices of companies with large bets levied against them.
The White House press secretary Jen Psaki said the Biden administration was "monitoring the situation" as shares of companies including GameStop, the hard-hit cinema owner AMC and BlackBerry surged in a volatile day of trading.
The dramatic moves highlight the growing influence of retail traders, who have organised on the message board site Reddit. The group has focused on pushing up stocks that are the subject of large short bets by hedge funds. Their success in rallying the stock price of GameStop has vindicated a group now targeting companies on both sides of the Atlantic.
Stocks such as the US home goods retailer Bed Bath and Beyond, the Finnish telecoms group Nokia, the German pharmaceuticals company Evotec, the former Financial Times owner Pearson and the Polish games developer CD Projekt rose strongly in intraday trading.
Shares in the cinemas group AMC, which earlier this week clinched a rescue financing, rose more than 300 per cent at one point on Wednesday, while the retailer Express more than doubled in value. GameStop, which has been at the centre of the retail trading bonanza, shot up more than 100 per cent.
The gains stood in stark contrast to a broad market decline triggered by concerns about the rollout of vaccines and pandemic risks to the economy. The US S&P 500 index slid 2.4 per cent and the tech-heavy Nasdaq Composite was down 2.2 per cent.
"It's like a wolf pack seeking out the weakest member of the herd," said Steve Solnick, chief strategist for Interactive Brokers.
The flash rallies prompted TD Ameritrade to put trading restrictions in place for several securities, including GameStop and AMC. The company said the limits could include restricting short sales or requiring 100 per cent margin for certain trades, moves it said would mitigate risks for itself and its clients.
“Restrictions vary by security, but could include things like allowing only long orders on options, 100 per cent margin requirements, and restricting short sales,” the brokerage said. “We made these decisions out of an abundance of caution amid unprecedented market conditions and other factors.”
Some of the companies whose shares surged were targets of Melvin Capital, a hedge fund that has been singled out by day traders. Those included Evotec, which was up 9.6 per cent; CD Projekt, which rose 5.3 per cent; and the German battery manufacturer Varta, which rose 12 per cent before trimming its gains to trade up 6.2 per cent.
Melvin on Wednesday revealed it had closed its GameStop position, having sustained a multibillion-dollar loss on its shorts since the start of this year.
Retail investors are using “a tried-and-true hedge fund strategy of swarming crowded trades held by weak-handed investors”, said Andrew Beer, managing member at fund firm Dynamic Beta Investments.
In contrast to in the US, which has limited disclosure on short bets, hedge funds and other investors have to disclose when they have shorted more than 0.5 per cent of a company’s stock in the EU and the UK, making it easier to target a fund’s positions.
Melvin's latest disclosure shows it has bet against more than 6 per cent of Evotec's shares, making it the largest single wager against a European company by percentage of shares shorted, according to the data provider Breakout Point. The US hedge fund's bet against Varta is the fifth largest.
The “short squeeze phenomenon fuelled by retail investors’ discussions is spilling over to Europe”, said Ivan Cosovic, founder of Breakout Point. “We are recently detecting some European stocks being touted as ‘the next GameStop’ among retail investors.”
The targeting of hedge funds will be viewed with irony by many financial market insiders, given that such funds are often the protagonists in short selling attacks on troubled companies.
Heavily shorted shares with no link to Melvin Capital also rose on Wednesday. Shares in Pearson, the British education publishing company that is the third-most shorted stock in Europe, according to IHS Markit, climbed 14 per cent to close at its highest level in 16 months. Daniel Sundheim's New York-based hedge fund D1 Capital Partners, which has also been shorting Varta, has the biggest bet against Pearson, at 3.8 per cent of its share capital.
The real estate company Wereldhave, in which Woodson Capital has disclosed a 4.2 per cent short position and London-based Adelphi has a 3.6 per cent bet, rose about 5 per cent.
Hedge funds in Europe are now fervently scouring lists of most-shorted stocks and message boards such as Reddit for any signs that their short bets could be in trouble.
“Any good hedge fund group will be looking at this,” said the head of one multibillion-dollar European hedge fund firm.
One European hedge fund manager who specialises in short selling described the recent stock market rallies as “insane”, but said the elevated share prices of troubled companies would “make a great opportunity” for short sellers that survived the week’s mayhem. – Copyright The Financial Times Limited 2021