Wednesday 3 February 2021 11:32 am Fladgate Talk

When will the fun and GameStop?

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Eleanor is an associate in the corporate department at Fladgate. She advises on a broad range of corporate matters including mergers and acquisitions, private equity transactions, joint ventures, investments and re-organisations. She has acted for clients within a variety of sectors including hospitality, technology, entertainment, gaming and real estate.

Retail and day traders dealing in shares and other assets that Wall Street funds bet against may not be new; Wallstreetbets, the Reddit group at the centre of the story, itself has been in existence since 2012.

However, with retail investors buying in such numbers as recently, the group has captured worldwide attention. Perhaps the novelty is that, the short squeeze was driven not just by the hope of profit but by animus against Wall Street firms, causing big losses at certain hedge funds and a probe by US regulators into possible market manipulation.   

It looked like the sway of the institutions had put a stop to the excitement when Robinhood, the free-to-use exchange platform, suspended trading, leaving its retail traders with two choices: hold or sell.  However, following a quickly filed lawsuit and public pressure Robinhood relented the same night saying it would resume “limited” buys on the stock the next day. Melvin Capital, the highest profile short-seller in GameStop, received additional cash commitments from its investors in the last few days to stabilise its position.  

Although enforcement action for market manipulation is considered unlikely, the rules regarding trading, on the whole devised in a time before commission-free trading and social media, could be reformed with regulators forced to respond.  

One should spare a thought for those innocent parties whose pension funds are invested in the hedge funds, as they increasingly are in the UK and elsewhere. The counter view is that short sellers identify and purge bad management and failing businesses, and even discover fraud such as at Wirecard.

Whatever response regulators take will take time to come into force.  For now, the actions of the online trading groups have left a major shadow over Wall Street, giving rise to the question – what next?

One answer might be silver, with #silversqueeze now trending on Twitter and prices being pushed by online traders to a six month high.  Unlike GameStop, a loss-making company, the silver market has seen strong growth during the pandemic.  There are fears however that these actions could ultimately lead to losses to retail investors themselves, with the price volatility undermining market confidence.  

Could the phenomenon happen in the London markets? It has been reported that hedge funds have closed large short positions against some of the most shorted UK stocks in the last few days in case the practice spreads. The FCA will be reviewing whether it has the tools to maintain market confidence in the age of financial social media.

At Fladgate we are experts in assisting companies in raising new equity, either through admission to the London Stock Exchange’s (LSE) Main Market, the AIM Market (AIM) or through a dual quotation if the company is already listed overseas. With a significant proportion of our clients being fast-growing and entrepreneurial businesses, we have developed wide-ranging experience of AIM and are regularly ranked by the independent legal directories as one of the leading law firms for AIM-related matters. We act for both domestic and overseas companies, as well as for nominated advisers and brokers on a range of flotations, reverse takeovers and secondary fundraisings across multiple sectors.