The online broker Trade Republic is overloaded because of the gamestop hype.
According to data provider Ortex Analytics, short sellers on Wall Street have suffered losses of more than 70 billion dollars (5.76 billion euros) due to the GameStop turbulence. In the past few weeks, retail investors purposefully bought shares in US video game retailer GameStop and other stocks forcing hedge funds to unwind their bets on the collapse of these securities.
According to Ortex, bets against GameStop alone have incurred losses of $ 1.03 billion so far. The Berlin online broker Trade Republic has reached its capacity limits because of the stock market hype about Gamestop. Trade Republic announced that customers could not have used the app to its full extent on Thursday because of an “extraordinary overload” of the connected trading venues. The background to this is the extremely high volume of trade in normally illiquid stocks such as that of the US video game retailer Gamestop and other companies such as AMC Entertainment, BlackBerry, Nokia or Bed Bath & Beyond.
The massive demand for such titles has occasionally led to technical problems at the trading center partner LS Exchange, said a spokeswoman for Trade Republic. The company then switched to the Tradegate trading center, which is now also struggling with technical problems due to the extraordinarily high trading volume. Trading in derivatives is not affected.
The background to the hype
Low trading fees, agreements in online forums and YouTube tutorials have triggered a stock market boom in the pandemic, with a new generation of small investors catapulting shares in troubled companies to unimagined heights. This phenomenon has already been observed in the past at companies such as the car rental company Hertz, but it is only through the extreme example of Gamestop that it is now receiving a lot of attention. The Gamestop papers, which have been fluctuating massively for days, lost 25 percent at the start of trading on Thursday, after increasing by 135 percent on Wednesday.
The computer game dealer is not the only company that is currently being gambled for in extreme ways on the stock exchange. The shares of the world's largest cinema chain AMC, for example, which was recently considered a bankruptcy candidate, opened 30 percent weaker. However, they had gained more than 300 percent the day before. An important reason for the countermovement on Thursday is that some trading platforms such as the Robinhood app, which is popular with small investors, temporarily banned the companies because of the price volatility. This also affected other companies such as the headphone manufacturer Koss or the stumbling smartphone pioneer Blackberry, which also got caught up in the speculative vortex with strong price fluctuations.
The course of the Finnish telecom equipment supplier Nokia also jumped wildly back and forth. The papers, like GameStop, have been targeted by speculators for a few days now, falling by 14 percent after they had previously gained 8.5 percent. A trader explained the decline in share price with the trading restrictions imposed by online broker Robinhood on some of the stocks hyped on internet forums. The Nokia titles listed in the USA are almost 30 percent in the red.
Chat platforms as a communication tool
The hype around Gamestop in particular shows the dimensions of the hype. Concerned about economic difficulties, the company's shares were still at a record low of $ 2.57 in 2020. But since mid-January, despite some strong fluctuations, the papers actually only knew one direction until the end – steeply upwards. The decisive factor behind the price rally is a relatively new phenomenon on the US stock market, in which masses of small investors come together in forums on the chat platforms Reddit or Discord in the style of flash mobs to buy specific stocks.
Thanks to a price war between online brokers, triggered not least by the securities trading app Robinhood, which has lowered fees massively, stock trading in the USA has developed into a kind of popular sport, especially for many younger people during the corona crisis. In addition, riskier transactions, for example with options in which, for example, only fractions of the value of a share certificate are traded, are now much more accessible to the general public and no longer only to finance professionals.
For example, Gamestop is one of the stocks that were recently heavily discussed on the Reddit online platform. Another hobby of the community is to use concerted actions to push professional investors out of the market who have speculated on falling prices. At Gamestop there was a real trial of strength with hedge funds, in which the small investors were able to prevail, at least for the time being. However, the phenomenon is not entirely new. For years there have been social trading platforms on which users exchange ideas in order to develop purchase ideas together.
Wall Street Journal: “War”
The price turbulence caused great excitement in the financial world in the middle of the week, the “Wall Street Journal” even wrote of a “war” that had broken out between hedge funds and amateur traders. Many online brokers had technical problems in the face of the busy market. Calls for a trade freeze were made to calm the situation. The SEC announced that it was keeping a close eye on the situation and announced an investigation. A White House spokeswoman said at the press briefing that a team from the Treasury Department was also monitoring the situation.
Most recently, Tesla boss Elon Musk, who is very present on the short message service Twitter, is said to have sparked the latest rally with a tweet about Gamestop and a link to Reddit users. Analysts warn, however, that the massive price increase has nothing to do with reality. Expert Jens Rabe thinks that the soaring of the Gamestop shares is damaging the reputation of the stock exchange, since the process is perceived as “gambling”. He calls for the supervisory authorities to take action, as stocks of small companies could be misused as pawns.
