BLK BlackRock Inc

By Joe Wallace, Amrith Ramkumar and Gunjan Banerji 

A weekslong mania centering on GameStop Corp. and AMC Entertainment Holdings Inc. suffered its sharpest reversal yet on Tuesday, following an exchange operator's decision to rein in the use of borrowed money in another hot market, silver.

GameStop shares suffered their largest-ever decline, dropping 60% and surrendering more than $9 billion in market value, despite a flurry of posts on online forums such as Reddit's WallStreetBets exhorting traders to hold on to the shares. AMC dropped 41%.

The rout in WallStreetBets favorites came after CME Group Inc. raised margin requirements for silver futures, which on Monday had posted their largest one-day rise in more than a decade -- a move many traders attributed to posts on social media calling for traders to buy silver. On Tuesday, silver futures fell 10% and the largest silver exchange-traded fund fell 8.3%.

Tuesday's selloff came as popular trading app Robinhood Markets continued easing the restrictions it adopted during last week's heavy trading. The firm reduced the number of stocks that face trading curbs to five, and further loosened restrictions on how many shares users can buy of GameStop, though the stock continues to carry the most stringent limitations. Robinhood earlier raised billions of dollars from investors to ride out the continuing trading frenzy. U.S. lawmakers said they plan to hold hearings on short selling, online trading and the role of social media.

Major indexes posted a second day of strong advances, extending a recent pattern in which assets favored by online traders move in one direction and U.S. blue-chips the other. The Dow industrials rose 476 points, or 1.6%, to 30687. The broad market's general health contrasts with the volatility and extreme behaviors exemplified by the WallStreetBets episode, traders said, noting that GameStop and others remain up sharply for the year despite Tuesday's declines.

"There's still further room for them to revert," said Mohit Bajaj, director of exchange-traded fund trading solutions at WallachBeth Capital. "The move down seems to be equally as dramatic as the move up."

Higher margin requirements often prompt selloffs because they force investors who have borrowed money to raise cash that they can then deposit with their brokers. Shares of GameStop and AMC were vulnerable to declines in part because their gains this year have been so large and because so many of the traders driving the rallies have been doing so using borrowed funds. Even after recent declines, GameStop shares have advanced nearly fivefold this year and AMC has more than tripled.

Traders said the rush to buy silver began after some participants on online forums suggested that aggressive buying could propel GameStop-like gains. Many traders on Reddit forums have contended that they weren't behind the swings, with some of them alleging that the idea is a ruse by hedge funds to diminish interest in GameStop.

Some analysts said Monday's surge in silver prices was spurred by traders inspired by the so-called short squeeze in GameStop and other stocks. A short squeeze happens when rising prices force bearish investors to buy back an asset they had sold short at a higher price.

But creating a short squeeze in the precious metal is impossible, Goldman Sachs Group commodity analysts said. To do that, an investor would need to hold a significant portion of the physical metal -- difficult given the cost of doing so in a $50 billion market for coins, bars and other investments, as well as rules limiting the size of positions individual investors are allowed to take on.

Declines in the iShares Silver Trust, a BlackRock Inc. exchange-traded fund at the center of the recent rally in the price of the precious metal, erased the ETF's gains for the year. ETFs are a popular way for mom-and-pop investors and day traders to play silver prices without touching the metal. But when demand for the ETF jumped in recent days, it set in motion purchases of the underlying silver, fueling prices.

Now, that rally is unwinding and shares of silver producers are also falling. First Majestic Silver shares fell 24%, while Hecla Mining dropped almost 20%. Fresnillo PLC shares slid 6.2%.

Short sellers have also backed away from WallStreetBets favorites, a force that has removed some fuel from the recent rally. GameStop and AMC shares that are being lent, a proxy for short interest, have fallen rapidly in recent days, according to data from IHS Markit.

An investor shorting a stock makes money if the price goes down and loses money if it goes up. GameStop and AMC's steep ascent in recent days caused some hedge funds and deep-pocketed investors to take big losses on their bets against those stocks.

Many trading platforms and online brokers are struggling to cope with the flood of new users and soaring transaction volumes. Freetrade, a London-based commission-free trading platform, had so many people trying to buy stocks on its platform on Friday that its foreign-exchange partner's bank cut its processing capacity by 95%.

Some investors just aren't giving up on GameStop. The most actively traded options contract tied to GameStop has been a bullish call tied to the shares jumping to $800, Trade Alert data show. GameStop shares dropped $135 Tuesday to close at $90.

"The victims in the failing GameStop experiment have and will continue to be the Robinhood investors storming the gates of capital markets without the size, the endgame plan, and the mathematical option pricing expertise to succeed," bond investor Bill Gross said in a statement.

Write to Joe Wallace at Joe.Wallace@wsj.com, Amrith Ramkumar at amrith.ramkumar@wsj.com and Gunjan Banerji at Gunjan.Banerji@wsj.com

(END) Dow Jones Newswires

February 02, 2021 18:21 ET (23:21 GMT)

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