The Potential Domino Effect of GameStop

After the GameStop stock market price rise, which company will be named as the next buying trend? Find out what investors are planning next.

The GameStop saga stopped the stock market in its tracks earlier this year, with wealthy hedge funds losing millions of pounds. The move was orchestrated on a subreddit thread, with vast numbers of average investors joining forces to push up the share price.

No one can deny the effect was tumultuous. However, what isn’t so clear is what will happen in the longer term. The legalities of the subreddit crowd are still in question, yet there’s no guarantee that it won’t happen again.

While creating a hike in price as significant as GameStop seems unlikely, there is an appetite for a repeat. There are many retail buyers who are keen to snap up shares that hedge funds are shorting in a bid to create another stock market tsunami. So could there be a domino effect following on from GameStop?

The Legal Position

The effect on the stock market and share prices may have been immediate, but the legal arguments have been a much slower burn. Regulators in the US and the UK face a very thorny issue trying to ascertain whether the subreddit thread investors did anything wrong.

There are stringent rules affecting stock and Forex exchange in the UK, just like in the US. In particular, market manipulation is illegal. There’s no exact definition of what falls within the boundaries of this. However, if you buy shares for the sole purpose of pushing up the price for reasons other than personal gain, that could be argued as being market manipulation. Buying shares in the hope the value will rise, and you’ll profit is fine – but that’s not exactly what was happening with GameStop.

There’s no clear indicator that what occurred is illegal, but it certainly falls within a shady area.

A large number of the investors who joined in, certainly in the later stages, were just jumping on a trend that could earn them money. That’s not the case for those who kicked things off, and that’s where there may be problems. However, even then, it’s not clear because “pumping” a stock for fun, provided that you’re not releasing misleading information, doesn’t technically fall foul of the law. There’s a strong argument that the subreddit thread didn’t have the capacity on their own to change the market substantially. In addition, they didn’t release misleading information to induce others to buy. For these reasons, the SEC and FCA may well decide that although dubious, there were no illegal manoeuvres.

Appetite for More?

There’s nothing to stop day traders from doing the same to other stocks in the absence of any action from the regulators. There have already been some rumblings, such as American Airlines, who saw their stock rise by 30% in a single day after it was mentioned on a subreddit.

There are several possible contenders, but the only way investors will see a repeat of GameStop is if they all decide to go after the same stock at once. Some hedge funds have said they will no longer short, but that’s not the case for all. There are still some firms that specialise in shorting stock, and subreddit users seem to be determined to make them pay.

Nothing is clear-cut just yet, but some of the stocks being circulated for a possible pump include Palantir, Nokia, Blackberry and AMC. The latter is the hot favourite for any future move, so if you’re interested in following this story, be sure to keep a close eye on volume sales for this stock.

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