FTSE 100 falls expected as GameStop Reddit fallout blows through global markets

The FTSE 100 was set for a sharp early fall today in what could be another volatile session triggered by the Wall Street Reddit drama.

Thursday’s session saw near-2% falls at one point, before the UK market recovered most of its losses by the afternoon. 

Markets have been rattled by retail investors on Reddit coordinating attacks against short sellers by buying large volumes of shares, often via options, in heavily shorted stocks. 

The effect has been dramatically to force share prices in those stocks higher because the hedge fund shorts, and the market makers offering the Reddit traders’ options, have to buy stock to hedge their positions.

The cause celebre in recent sessions has been a stock called GameStop, but yesterday it moved to American Airlines and others. 

That was until Robinhood and other online trading platforms used by the Reddit crowd stopped options purchases on certain companies that the group had been targeting.

As those stocks shares plummeted following Robinhood’s announcement, the FTSE 100’s morning’s tumble eased.

Today, though, traders were expecting another rocky start, with the CMC Markets platform seeing the FTSE opening down 80 at 6446 and IG Index calling it down 85. CMC had the Dax in Germany off 180 at 13486 and France’s CAC40 50 lower at 5466.

Wild swings were expected as Robinhood last night said it would allow its traders to resume trading in GameStop and others today. 

Explaining yesterday’s suspension of certain stocks, it said it had needed to temporarily pause while raising new funds from banks to meet regulatory capital requirements that had been affected by the volatility its customers had caused.

Robinhood’s announcement came long after US markets had closed, but overnight trading saw GameStop shares surge more than 60%. BlackBerry and AMC - other Reddit targets, also gained.

The retail activists are having a huge impact on short sellers, triggering huge losses in some cases. Others are cutting and running from their positions. 

Muddy Waters, the hedge fund which has a track record of exposing fraudulent or badly run companies and adopts short positions in their stock, has pulled out of the market, buying stock to cover most of his short positions.

The Reddit attacks are often seemingly inspired by an anti-Wall Street sentiment targeted at short-sellers in particular. But they have triggered huge paper profits in some cases for the biggest financial institutions who hold long and short positions. 

The American Airlines surge yesterday took UK airlines higher, too, so it could be another volatile session for easyJet and IAG today.

The Prudential could see gains after its shock warning of a potential $3 billion equity raise spooked investors yesterday. The Pru’s shares fell 8%, but some investors are bound to see that as a buying opportunity given the long term opportunities in Asia that the funds will be used to exploit.