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Why the GameStop share price soared then crashed overnight

Collectively, S3 Partners estimates that funds and other individuals have lost approximately $5 billion shorting GME.

We are currently seeing increased volatility in certain stocks, including GameStop and AMC. This increases the risk of sudden, large or rapid loss and the potential for gaps, where stocks fall dramatically when the market opens. Please note that IG does not offer options on GameStop or AMC Entertainment, or the ability to short these stocks.

GameStop share price plunges in after-hours trade, rebounds soon after

As if not characterised by enough twists, turns and absurdities, the WallStreetBets-GameStop saga reached new heights on Wednesday: GameStop (GME) finished out the session up 134% at $347.51 per share as traders continued to pile into the hot stock, only to crash in after-hours trade as WallStreetBets (WSB) went dark.

Beyond that, Melvin Capital said it closed its short positions on the stock to massive losses, and the SEC said it was actively investigating what was unfolding in equity and options markets.

That sharp dip in after-hours trade looks to have been driven by panic over the WSB subreddit going private. While the subreddit was offline (private) for just a little while, it created panic nonetheless. Speaking to the commitment of its community however, a replacement reddit, WallStreetBetsNew was quickly pushed live, attracting 100 thousand new members at a rapid click.

Overall, as @IGSquawk put it, commenting on these after-hours moves:

‘/Wallstreetbets back online but the panic caused $GME to hit 217. Now trading at $300.’

Pressure on WSB ratchets up

Institutions have indeed ratcheted up the pressure on WallStreetBets in the last few days, a forum which has come to be associated with big bets, brash and unsavoury language, and a ‘YOLO’ approach to trading.

While WSB has long been viewed as a joke by ‘serious’ market participants – the recent GameStop rally has brought to light the power of a subreddit that now boasts over 3.6 million self-described ‘degenerates’. Despite the whacky tone of the forum, many outside of Reddit have now started accusing WSB of manipulating markets.

How WallStreetBets Redditors Used Their Collective Power to Manipulate the Stock Market, published by Esquire, is just one such example of the allegations being levelled against WSB.

In addition to that, as pressure mounts, the U.S. Securities and Exchange Commission (SEC) looks to be ramping up its rhetoric against internet-based stock discussions, on Wednesday (US time) tweeting:

‘We are aware of and actively monitoring the on-going market volatility in the options and equities markets and, consistent with our mission to protect investors and maintain fair, orderly, and efficient markets.’

‘We are working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants.’

Shorts not so short

One of the key actors in this drama – Melvin Capital – is said to have closed out its short position in GME on Tuesday, suffering devastating losses in the process, according to CNBC. This comes after Steven Cohen’s Point72 and Citadel’s Kenneth C. Griffin are poised to pour $2.75 billion into Melvin Capital.

The same fate has befallen controversial short-seller Andrew Left. According to Bloomberg, he has also closed out ‘most’ of his short positions on the stock, racking up losses of more than 100% in the process. Things change quickly in markets, earlier this week Mr Left told Reuters:

‘If I had never been involved in GameStop and came to this right now, would I still be short this stock? 100 percent.’

Collectively, S3 Partners estimates that funds and other individuals have lost approximately $5 billion shorting GME.

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