Reddit investors shake up Wall Street

Trading app Robinhood said it will resume limited buys of volatile stocks that it had restricted earlier in the day.

Starting Friday "we plan to allow limited buys of these securities," the company said in a blog post Thursday. "We’ll continue to monitor the situation and may make adjustments as needed." 

Robinhood's decision to limit trades of GameStop (GME), AMC (AMC) and others that were bid up by a group of traders on Reddit sparked an immediate and intense backlash from retail investors. The WallStreetBets subreddit accused the app of market manipulation.

Within hours of the decision, one Robinhood user had filed a class-action lawsuit against the company, which has built its reputation on democratizing investing.

US stocks ended sharply higher on Thursday. Economic reports in the morning underscored the need for more stimulus once again. Meanwhile earnings season keeps going. Apple (AAPL) was the worst performing Dow stock, closing down 3.5%, after reporting a blowout fourth quarter late Wednesday.

Elsewhere, some shine wore off for the Reddit favorites GameStop (GME) and AMC (AMC) after brokers and trading platforms restricted trading in those companies. GameStop closed down more than 44%, while AMC sold off more than 56%.

Webull is once again allowing users to buy stocks of GameStop, AMC and Koss.

Shortly before 11:30 am ET, Webull had announced it was restricting users from buying shares of those three companies because of "extreme volatility."

At 2:35 pm, though, the company reversed course:

Many traders have been swarming to Webull and other alternative brokerage apps after Robinhood restricted trading for GameStop and others on Thursday.

Democratic Senator Sherrod Brown, the incoming chairman of the Senate Banking Committee, announced plans Thursday to hold a hearing on the turbulent state of the stock market.

“People on Wall Street only care about the rules when they’re the ones getting hurt," the Ohio Democrat said in a statement.

The decision to hold a hearing comes after days of wild swings in shares of GameStop (GME), AMC (AMC) and other stocks bid up by a group of traders on Reddit. The enormous rallies have caused heavy losses for some hedge funds that bet against the stocks.

"American workers have known for years the Wall Street system is broken – they’ve been paying the price," Brown said. "It's time for the SEC and Congress to make the economy work for everyone not just Wall Street."

Brown did not set a date or the parameters for a hearing.

A Robinhood user filed a class action lawsuit against the platform on Thursday after it restricted trading of GameStop (GME) stock — which has soared in recent weeks thanks to the support of Reddit traders — causing it to lose much of its value today. 

The complaint alleges that Robinhood’s action deprived users of taking advantage of potential gains as GameStop’s stock rose later in the day, as well as making it impossible for them to “short” the stock in case it drops. It also alleges that Robinhood customers have endured “substantial losses” because of the move, and claims the trading platform violated Financial Industry Regulatory Authority rules by denying users the opportunity to trade the stock. 

“Upon information and belief, Robinhood’s actions were done purposefully and knowingly to manipulate the market for the benefit of people and financial institutions who were not Robinhood’s customers,” the complaint, filed by Brendon Nelson, alleges. 

Robinhood said in a statement Thursday that, “in light of recent volatility, we are restricting transactions for certain securities to position closing only.” 

The company took similar actions for other stocks, including AMC (AMC), BlackBerry (BB), Nokia (NOK) and others, something the suit also takes issue with.

“Robinhood continues to randomly pull other securities from its app for no legitimate reason,” the complaint states. 

A hashtag once devoted to spreading baseless conspiracy theories about the 2020 election has now been taken over by investors fuming over the decision by online brokerages to restrict trading of shares of GameStop and other volatile stocks. 

On Twitter, #StopTheSteal had been a major source of election misinformation, having been inspired by a now-banned Facebook group of the same name. 

But on Thursday, as Robinhood moved to limit purchases of GameStop, irate Twitter users called for the stock trading app to “stop the steal” that is allegedly underway on behalf of hedge funds and at the expense of the retail investors (and Reddit users) who had driven up GameStop’s share price. 

The hashtag is now filled with angry traders.

“When working class people lose money in the market it’s CAPITALISM,” wrote one user. “When a hedge fund loses billions because the working class played the game better then it’s STOP THE TRADING.”

“#STOPTHESTEAL OF EQUITY (ECONOMIC CAPITAL) FROM THE RETAIL INVESTOR,” wrote another. 

The evolution of the hashtag from a hub of misinformation into a hotbed of populist economic fervor may only be temporary. But it underscores just how quickly conditions can change on social media.

Well that didn't last long.

Even after it reported a record loss and warned of a larger loss in the first quarter than in the most recent three months, American Airlines shares took off like a rocket early Thursday. Shares were up as much as 87% at one point in premarket trading, with the help of investors posting on Reddit who hoped to drive up the price and put a squeeze on investors who bet against it by shorting it.

"AAL flying to moon?" wrote one investor. "Let's see if we are going to get some tasty juice out of a squeeze."

According to S3 Partners, about 19% of American shares are controlled by short-sellers. No other US airline has as much as 5% of its shares held by shorts.

But soon after the market opened, American shares reached their high of the day, rising 31.4%. And then they started a steady decline throughout much of the rest of the day. By mid-afternoon they were up less than 10%.

The roller coaster ride for GameStop (GME) shares is having a major impact on other companies in the retail world -- the big mall owners that have shopping centers with GameStop and other struggling brick and mortar stores as their tenants.

Shares of Macerich (MAC), which like GameStop is both a favorite target of short sellers and the individual investors on Reddit who are trying to squeeze the shorts, fell nearly 20% Thursday. But the stock is still up more than 70% in 2021, including a nearly 40% pop in just the past five days.

Macerich isn't the only mall owner tumbling Thursday. Shares of Washington Prime Group (WPG) and Tanger Factory Outlet Centers (SKT) each fell sharply but they both have still gained more than 25% in the past week.

And then there's PREIT (PEI). It also fell sharply Thursday but is up about 25% in the past few days and has more than doubled this year -- even though the mall owner filed for bankruptcy last November.

Scott Crowe, chief investment strategist at CenterSquare Investment Management, a real estate investing firm, said in an email to CNN Business that the most distressed parts of the retail real estate world have soared. But that can't last forever.

"Speculative mania will continue until it is tested and breaks," he said.

That appears to be what's happening today.

GameStop (GME) is looking a lot less hot in the early afternoon: The retailer's shares are down 40%.

But it was a different story earlier in the day when GameStop's stock rose s much it became the biggest company by market capitalization in the Russell 2000, America's small-cap stock index.

This morning, when GameStop soared to a high of $483 per share, its market capitalization was $33.7 billion, pushing the previously largest company Plug Power (PLUG) to second place, according to Refinitiv.

Since then, GameStop's fortune has turned and the company is only the third largest player in the index.

But here's what's even crazier: At its peak, GameStop's weight in the Russell 2000 index was 1.03% thanks to its sudden ascent. At the start of the week it had just been 0.13%, which gave it the 170th spot in the index, and coming into the year it was only 0.04%, or the 747th rank of the index, according to Refinitiv.

What difference a few days can make.