The GameStop (GME) chaos last week, when a chatroom-inspired band of retail investors went on a coordinated buying binge aimed at "short squeezing" Wall Street's short sellers, driving the price of a loss-making video game retailer up from about $43 to $347.51, is likely to be a short-term phenomenon, believes Barclays Bank Plc.
While the rollercoaster trading and GameStop's surge may have triggered enormous volatility across the market, as the Reddit users eyed other heavily shorted stocks, the bearish positions are predicted to be insufficiently large enough to have long-term ramifications for investment funds.
"The ongoing short squeeze in a few stocks by retail investors has raised concerns of a broader contagion… While we believe there is more pain to come we remain optimistic that it is likely to remain localised", Barclays Plc strategists, led by Maneesh Deshpande, were cited by Bloomberg as saying in a note to clients on Friday.
The turbulence in the targeted stocks had spread like wildfire, as hedge funds sold out their more liquid holdings to raise cash to cover their shorts.
The entire market ended the week more than 3 percent lower. The bizarre events spawned numerous controversies, as fears were voiced that the short squeeze could "ricochet" on a broader scale.
Barclays explored a range of scenarios, calculating the expected value of bearish equity bets versus overall market capitalisation to discover that short sales have declined during the past year to their lowest level since at least 2008.
The most-heavily shorted companies, targeted by day traders throughout the year, were shown to have bearish wagers amounting to less than 0.001 percent of the $43 trillion market. During the selling last week concerns had been sparked over the possibility of a sweeping contagion.
Echoing Barclays' forecast, Marshall Front, chief investment officer at Front Barnett Associates, was cited by Bloomberg as saying:
"We're witnessing a nearly unprecedented amount of speculative activity. But on the other hand, we are talking about a very narrow group of stocks that don't have an outsize influence… A very aggressive and accommodative policy by the Federal Reserve is still intact. Together, they help the stock market on the way up".
"Although the short squeeze started with GME, it appears to be spreading to a wider range of stocks. While we expect some more deleveraging, ultimately the scale of the problem appears quite limited", added Barclays.
Last week, Reddit traders left several major hedge funds nursing losses worth billions of dollars in retaliation for "shorting" firms such as GameStop, a retail electronics store, and Nokia.
The day traders, who launched the attack as part of their plan to "fight back" against hedge fund giants, profoundly raised the stock price of the gaming retailer and some other firms, such as Nokia and Blackberry, that had gradually lost value over the past few years.
Financiers had been effectively betting on their failure, yet as computer investors sent the stock prices surging Wall Street aces lost billions of dollars.
This is a real billboard in Times Square lmao pic.twitter.com/M4fy6JYtyF— Joshua Potash (@JoshuaPotash) January 30, 2021
In the midst of the chaos, trading app Robinhood, popular with amateur investors and used by them to coordinate their moves to raise the value of GameStop shares, temporarily found itself under fire. It was forced to fend off accusations by some of favouring hedge funds, when it shut down or restricted trading on some of the most affected companies.
Defending its moves in a blog post, the brokerage platform explained it had put temporary buying restrictions on some securities because central Wall Street clearinghouse-mandated deposit requirements for equities increased tenfold.
"It was not because we wanted to stop people from buying these stocks", Robinhood said in a blog post published late Friday.
Reflecting on the long-term repercussions of the "revolt against Wall Street", Barclays concluded:
"We remain optimistic that it is likely to remain localised. The bottom line is that while the pain could continue in the short term, the risk of a full-fledged contagion remains low".