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GameStop shares tumble while SEC probes trading activity

Shares in GameStop slid more than 15 per cent on Thursday, after the video game retailer announced it was planning to issue new shares and disclosed that the US Securities and Exchange Commission was investigating trading activity in its stock.

The company, which was one of the first to become a retail-favoured so-called “meme stock” in January, said after markets closed on Wednesday that the SEC had contacted its staff on May 26 for assistance in an investigation into its stock activity. GameStop said it does not expect the inquiry to “adversely impact us”, and that it plans to “co-operate fully with the SEC on this matter”.

The retailer also said it plans to file a registration with the SEC for up to 5m additional shares, which, if issued, would dilute the value of the shares of current investors.

“When you dilute for shareholders your stock price is supposed to go down, so in a way that is some sense of normalcy. Outside of that, GameStop trades on pixie dust and dreams,” said Anthony Chukumba, managing director at Loop Capital, who covers the gaming industry. “The stock has completely disconnected from fundamentals and that hasn’t changed. So whatever GameStop reported yesterday, it wouldn’t make any difference to the Reddit traders.”

Shares in GameStop, as well as a handful of other retail-favoured stocks, have bounced around widely in the past two weeks, as amateur investors revamped their enthusiasm for trading from earlier in the year. Back then, retail traders organised on online messaging boards managed to inflict losses on hedge funds betting against GameStop by pushing up its shares.

But industry experts note that the speed of the latest swings in company valuations suggest that heavier-hitting investors are also now participating alongside retail investors.

“Retail cannot cause these sharp moves alone,” Chukumba said. “Hedge funds are not idiots, there are a bunch who have figured out this game and how to exploit this.”

Despite the drop on Thursday, chatter about GameStop on the Reddit messaging boards was muted compared to other popular stocks, according to data providers. Again, that suggests that retail investors may not be as active in this latest drop.

The company registered in the bottom of the top 10 most discussed stocks on the platform, according to data provider BreakoutPoint. “It’s surprisingly little. They’re not so excited, they’re not so angry,” said Ivan Cosovic, founder of BreakoutPoint.

Retail activity had cooled down in the months since shares GameStop and other companies first spiked, but pushed higher again in recent weeks, led by cinema chain AMC Entertainment. Last Wednesday alone, shares in AMC rose 95 per cent.

On Thursday, AMC also fell close to 10 per cent by lunchtime in New York, following a similar slide on Wednesday. Its stock is still up close to 2,000 per cent since the beginning of the year. GameStop is up more than 1,200 per cent since the start of the year.

So far, the resurgence of the retail trading craze has not infected broader equity markets. The blue-chip S&P 500 and the technology heavy Nasdaq Composite were both up 0.4 per cent by lunchtime in New York, after trading in a tight range for the past sessions.

“There’s been these small, mini-fires happening all over the forest, but they have not led to a broader forest fire as of yet,” said Maneesh Deshpande, head of US equity strategy at Barclays. “It’s worrisome, but it’s not been a macro-event.”

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