GameStop, AMC Stocks Drop in After-Hours Trading Following Huge Reddit-Driven Spike

Short-sellers were still taken to the cleaners, however

Last Updated: January 27, 2021 @ 6:36 PM

The stock prices for video game retailer GameStop and the parent company of AMC Theaters dropped in after-hours trading after a day of huge spikes driven by a Reddit group called WallStreetBets. But the share value for both companies remained at highs neither company has seen in ages.

As of 8:30 p.m. ET, shares of AMC Entertainment Holdings were trading for $14.60, down from a high of just above $20.00 per share at the start of business on Wednesday. And GameStop, which peaked at $347.51 during normal hours, was trading for $292.00.

But even with those declines, the companies are having a very good night so far. AMC closed on Tuesday night at just $4.96 per share, but opened above $20 per share in early trading, sparking several halts in trading as Wall Street decision makers attempted to get a handle on what was happening. As a result, AMC’s stock spike increased the company’s market cap to about $5.4 billion.

Meanwhile, GameStop’s incredible Wednesday was the culmination of two weeks of heavy trading that has inflated the company’s value by 1,500%.

It’s almost all thanks to WallStreetBets, a subreddit founded in January 2012 as a meeting place for both new and experienced investors to network and also talk about their bets (as in, what’s good, what to hold, etc). The subreddit quickly grew into a forum for amateur — and often unvetted — wannabe financial advisors who brag about huge gains to encourage other people to play the stock market.

WallStreetBets exploded in size over the last year — partly thanks to the pandemic, which had lots of people looking for alternate ways to make money. Members started betting heavily on companies like GameStop and AMC that have been heavily shorted, or bet against, by large hedge funds. The way it works is that an investor, more usually a hedge fund or similar entity trading on behalf of multiple investors, borrows shares to sell at what they think is a high price, only to buy them back at a lower price and profit off the gap between prices.

The practice has been heavily criticized in recent years and is cited as a reason why companies that were struggling ended up failing entirely. And as it happens, many members specifically said their goal was to do real harm to hedge funds and other entities engaging in short-selling.

See, by buying up shares in shorted companies such as GameStop or AMC, WallStreetBets investors aimed to create what is referred to as “a short squeeze.” That’s when a company’s stock price runs higher than short-sellers anticipated, forcing them to buy the shares back at the higher-than-expected prices to stave off even deeper losses.

According to NBC reporter Jo Ling Kent, short-sellers incurred $14.3 billion in losses on Wednesday alone. In fact, Melvin Capital, a hedge fund specifically targeted by WallStreetBets members, closed out its investment in GameStop entirely, though the full extent of the fund’s losses are not known at present.

This has naturally caused much freaking out among regulators, commentators and even social media companies, where members of WallStreetBets gather. The group also operated a Discord server, which was banned on Wednesday due to what Discord said was repeated examples of “hate speech” by members.

Soon after, creators of the WallStreetBets on Reddit made the sub private, explaining in a public statement that it would be more strictly policing content to avoid the same thing happening there. They also said in a separate statement that “Discord did us dirty” and that they were making an effort to get the Discord server back online.