Shares of banks and other financial institutions fell as Wall Street was gripped by a titanic struggle between Robinhood day traders and hedge funds on the stock market.
Day traders have seized the upper hand. Melvin Capital, a hedge-fund firm founded by high-profile trader Gabe Plotkin closed out its short positions on videogame chain GameStop after a host of speculators organized on messaging service Reddit to orchestrate a "short squeeze." A squeeze is when short-sellers like Melvin are forced to buy back stock they've borrowed in hopes of a decline by an upward spiral in the price of the stock.
The showdown between Melvin and the day traders reached the point where Melvin had to seek a $2.75 billion bailout from fellow hedge fund firms Citadel and Point72. There was also evidence the upheaval for Melvin and hedge funds trapped in the GameStop trade liquidated other positions under pressure.
The Goldman Sachs Hedge Fund VIP exchange-traded fund, which tracks a basket of stocks the brokerage selects as the most popular hedge-fund bets, fell by more than 3%, one of the biggest selloffs since the pandemic began in earnest.
In more evidence that day traders' tactic of deliberately triggering "short squeezes" is having a devastating effect, 98 out of the 100 most heavily shorted stocks have seen gains in the last week, with more than 10 rising by 75% or more in that stretch, according to the Wall Street Journal's Market Data Group. The CBOE market volatility index, or VIX, spiked by about 30%, suggesting that traders are bracing for more volatility.
JPMorgan Chase, the largest U.S. lender, is launching a digital bank to offer consumer banking services in the U.K. for the first time.
Write to Rob Curran at rob.curran@dowjones.com
(END) Dow Jones Newswires
01-27-21 1748ET
