GameStop share trading restricted after Reddit buyers cost hedge funds billions

29 January 2021, 08:45 | Updated: 29 January 2021, 09:08

UK investors are facing warnings over “highly volatile market conditions” after a cohort of amateur investors joined forces to inflate the price of shares in US video game chain Gamestop, costing hedge funds billions.

Market regulators in the US are reviewing the trades which saw a huge spike in the value of shares of struggling retailer Gamestop following an internet campaign.

Shares in the firm shot up by as much as 1,700 per cent, driven by users on social media platform Reddit who wanted to get back at Wall Street.

The FCA has cautioned that amateur traders who might join the Reddit group in buying GameStop shares could even fall foul of rules on market abuse if they were found to have artificially inflated the price of a stock.

The latest development in the story saw major trading platforms block the buying of shares in GameStop and some other companies, sparking outrage from small individual investors who accused the system of being ‘rigged’ against them and in favour of wealthy hedge funds and Wall Street firms.

Hedge funds and other large investors that bet against GameStop have lost more than $5bn, according to data analytics company S3.

GameStop shares surged when big investment firms started ‘shorting’ stocks after identifying the high street video game business was struggling due to tough market conditions.

But a group of amateur investors spotted the short was happening and started buying GameSpot shares in large numbers, causing the investors’ position to fail.

It meant the short sellers faced huge losses as they had to buy back borrowed shares quickly to prevent even bigger losses - but this buyback process only caused the price of the shares to rise higher.

Incoming chair of the US Senate banking committee, US Senator Sherrod Brown, posted online: “People on Wall Street only care about the rules when they're the ones getting hurt.

“It's time for SEC and Congress to make the economy work for everyone.”