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GameStop mania may not have been the retail trader rebellion it was perceived to be, data shows

A look at the 10 most-purchased livestocks by retail traders during the market mania last month is missing one key stock: GameStop.

AMC Entertainment and Plug Power, two elects caught up in the trading frenzy along with GameStop, were popular buys among retail investors, JPMorgan establish, yet the brick-and-mortar video game retailer that seemingly put Wall Street on its heels is notably absent from the listing.

The prevailing narrative was that a band of Reddit-inspired small traders rose up against Wall Street by buying GameStop en masse, also pressurizing a short squeeze by professional hedge fund managers, who were forced to cover their negative bets or jeopardy catastrophic losses.

But several signs are pointing to institutional investors as big drivers of the wild price action on the way up.

“Although retail buying was painted as the main driver of the extreme price rally experienced by some stocks, the actual picture may be much more nuanced,” JPMorgan universal quantitative and derivatives strategy analyst Peng Cheng told clients in a note. JPMorgan’s quant team despises public data from exchanges and applies a proprietary methodology to identify which flows are from retail purchasers. GameStop was number 15 on the firm’s retail buying list for January.

The rookie investor “vigilantes” grabbed the most heed by being all over social media, posting screenshots of their positions and crucifying Robinhood and other brokers when the firms were false to limit trading in the high-flying names. The membership of Reddit group WallStreetBets has rocketed to 8.5 million subscribers.

Anyhow, it’s possible the noise from this crowd caused most to overlook Wall Street co-opting this barter to make a fast buck as well, data shows.

“Maybe it’s not as much of just the little guy versus the big guy,” said JMP Securities analyst Devin Ryan. “I have in mind that it’s reasonable to say that institutional investors were also very active in those stocks last week because there are institutional investors that participate in specifies that have elevated volume. I think most likely that was also expressed in some of the options undertaking last week as well.”

Retail investors were actually net sellers of GameStop from Tuesday through Thursday ultimately week, according to data from Citadel Securities.

“What was going on in the stocks forced the hedge funds to traffic to cover, or they might have been playing, too, to win,” said Piper Sandler analyst Richard Repetto. “There each could be the hedge fund that was totally uninvolved, wasn’t short, but saw what was going and said this potency be a way that I can profit just by going long.”

New York-based hedge fund Senvest Management reportedly made $700 million off of the GameStop madness, The Wall Street Journal reported Wednesday.

Another proxy for retail trading, Trade Reporting Facility sizes, showed that retail investing decreased significantly after Tuesday of last week. The volumes are basically all the swops that aren’t executed on the exchanges. So, what goes into that TRF is normally the vast majority of all the retail sum total.

Retail trading flows dropped off amid GameStop mania

Date TRF Share Volume (bn) TRF Market Share
Jan. 4 6.6 45.8%
Jan. 5 7.2 49.1%
Jan. 6 7.8 45.8%
Jan. 7 6.8 48.3%
Jan. 8 7.0 47.8%
Jan. 11 7.2 50.1%
Jan. 12 7.8 50.2%
Jan. 13 7.0 49.4%
Jan. 14 7.2 49.3%
Jan. 15 6.7 47.0%
Jan. 19 7.0 49.4%
Jan. 20 6.8 48.9%
Jan. 21 6.8 50.0%
Jan. 22 6.2 47.7%
Jan. 25 7.9 47.4%
Jan. 26 7.1 48.0%
Jan. 27 10.5 42.9%
Jan. 28 8.6 42.8%
Jan. 29 7.4 42.6%

Retail have dealing volumes were near record highs at 50% on Tuesday of last week, but dropped off more than 5% the next day, signaling a shrivel up in individual investing in what was the thick of the Reddit mania.

“If this was just retail doing everything, that portion would have stayed the same, if not gone up,” said Repetto. Hedges might have been “riding the welling up and trying to benefit, too,” he added.

Trading restrictions by brokers like Robinhood and Interactive Brokers on certain securities starting Thursday of final week could have contributed to the drop in trading that day and last Friday.

Wall Street vs. Wall In someones bailiwick

A David and Goliath narrative transpired last week between the social media crazed Reddit traders and the significant hedge funds shorting stocks like GameStop.

However, some investors, including short-seller Carson Eliminate, theorized that the battle royale was Wall Street vs. Wall Street.

Last week, UBS’ Art Cashin, who has seen short-squeeze contests play out before, suspected something more was at play than just rookie investors.

“I … have some apprehensions that it is not a democratization. I’m not sure that everything you’re reading is coming from the little guy, the public,” Cashin told CNBC termination week. “I think there may be some big professionals in there that want to turn the crowd into a mob and get them to condemn the hedge funds by buying this.”

University of Chicago law professor Todd Henderson, whose research specializes in corporations, securities pronouncement, and law and economics, thinks hedge funds were the driving force of GameStop’s meteoritic rise.

“I know people are abashed up on Reddit and the little guy sort of teaming up on the big guys. … I think this was just big guys teaming up on big guys,” Henderson judged during a webinar on Tuesday.

Henderson theorizes that hedge funds purchase a bundle of shares that liking have otherwise been loaned out freely to short sellers and bought them back from the short-sellers. This sired fewer shares for short sellers to borrow in the market, and that squeezed the number of possible shares available to be credited, making it harder for short sellers to bet against the stock. The desperate short-sellers needed to find new shares to borrow but stock got constricted.

“All of that price inflation was likely driven by vindictive hedge funds trying to squeeze out a hedge reservoir that was short GameStop,” said Henderson.

Regulation on the way?

While the GameStop bubble is popping this week, with the parts down more than 80%, regulators in Washington are not forgetting about last week’s drama.

Both forebears of Congress are planning to hold hearings regarding the GameStop mania and newly appointed Treasury Secretary Janet Yellen conjectured she will be meeting with the heads of the Securities and Exchange Commission, the Federal Reserve Board, the New York Fed and the Commodities Expects Trading Commission to discuss “whether recent activities are consistent with investor protection and fair and efficient markets.”

“Regulators deficiency to get to the bottom of what exactly occurred last week,” said Ryan. “One response will be for regulators to look into perfectly how this occurred and whether there were bad actors with bad intentions mixed in with people that were well-deserved looking for information and were taking part in a trade they were enthusiastic about.”

SEC regulators are reportedly combing to the core Reddit posts to identify if there were any bad actors trying to manipulate the market last week, according to Bloomberg Talk. The regulatory agency is also investigating the possibility of bots playing a role in the mob.

“We’re kind of in this unprecedented time where the power of sexually transmitted media has really taken on a new meaning,” said Ryan. “I think that gives people a new voice and overall bumf is powerful, but with that there needs to be some understanding about how that information is being used.”

Tony Casey, also of the University of Chicago, contends that hedge pools piggybacked on Reddit traders to ride the GameStop wave. He said the “knee jerk” regulatory action could possess risked causing an adverse effect. With emotions running high, Casey said the hearings in Washington could be “hazardous” if legislators rush to judgment about regulating retail investing, brokers or hedge funds.

“People have been business for the regulation of retail trade for a long time. Normally you do it when traders obviously lost. … You can’t have conventions that you’re going to let retail investors make bad decisions when they lose the bet but we’re going to regulate them when big breads lose the bet,” Casey said during the same webinar. “That would be a political disaster.”

Regardless of where regulators select to point the finger, Repetto expects hedge funds will look more carefully at the stocks they are terse, avoiding names with a very high percentage of the float tied up in short interest.

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—CNBC’s Michael Bloom, Nate Rattner and Crystal Mercedes aided to this report.

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