Health insurance startup Clover Health was the first company to be targeted by a short-selling report in weeks on Thursday, as a trading frenzy driven by small-time investors eased further and regulators met to look into the affair.
Shares of Clover, which went public last month and is backed by venture capitalist Chamath Palihapitiya, tumbled 6.3%. GameStop and AMC, which have been at the heart of the so-called “Reddit rally”, also fell in the latest sign that the social media-hyped trading action was fading.
GameStop shares are now down about 83% since hitting a peak of $483 each last week and AMC’s value has more than halved after two weeks of stock market maelstrom that pitched amateur traders against Wall Street institutions.
Set to meet on the issue later in the day, U.S. Treasury Secretary Janet Yellen said that she and financial market regulators were seeking to “understand deeply” what had happened in the frenzy before considering action.
Kim Forrest, chief investment officer at Bokeh Capital Partners in Pittsburgh, said retail investors burnt in the wild gyrations of the past two weeks were now likely to be more cautious in bidding up shares of companies with a high short interest.
“(Retail investors) can see that this is a roller-coaster ride and not a one-way trip up, and that’s probably given them a little more pause before pushing the buy button.”
Famous as an early Facebook executive and the owner of the Golden State Warriors basketball team, Palihapitiya was among the tech sector billionaires who encouraged the GameStop trade last month by saying he had bought into the company’s shares.
Hindenburg, which called Clover a “broken business” in the title of its report, said it had taken no short or long investment position – market code for a bet on its shares – in the company. The group added it was important investors understood the role short-sellers and their research played in financial markets.
On WallStreetBets, the Reddit forum at the center of the squeeze that has hurt hedge funds and other “short” sellers, posts asking participants to weigh in to defend Clover were given short shrift.
“Nope, not buying it. Only buying GME,” said one post.
MARKET DISTORTIONS
Yellen will meet with the heads of the U.S. Securities and Exchange Commission (SEC), Federal Reserve Board, Federal Reserve Bank of New York and Commodity Futures Trading Commission on Thursday to discuss the affair.
Analysts say focus could fall on the online forums where mass buying of GameStop and AMC was discussed last week, and on the ever-larger role played by hedge funds in financial markets.
“Any kind of market distortion by investors agreeing to cause the distortion goes against the smooth and transparent functioning of markets,” said Andrea Cicione, head of strategy at TS Lombard.
“The reason this might not be covered by regulation yet is simply because it has never happened before. But now it might find its way into regulation in a more explicit way.”
The SEC is reviewing social media posts for signs of potential fraud, Bloomberg News reported on Wednesday.
Meanwhile, Tesla Inc Chief Executive Officer Elon Musk tweeted his support for cryptocurrency Dogecoin, sending its value surging more than 50%. Musk’s tweets about certain companies – including GameStop – and cryptocurrencies have contributed to the recent rally.
Thursday posts on Reddit implored investors to hang on to GameStop and AMC, although many analysts think the squeeze is probably over and broader market attention has begun to turn to the possible fallout.
“The retail frenzy that provided an unusual distraction over the last couple of weeks appears to have lost momentum,” said Craig Erlam, market analyst at OANDA Europe.
“A comeback tour may be planned at some point in the not-too-distant future but whether it will be as effective, we’ll have to wait and see.”
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