What happened
Shares of GameStop (GME 2.56%), AMC Entertainment (AMC), and Express (EXPR) plunged on Thursday, as brokerages moved to limit trading in volatile stocks. By the close of trading, their stock prices were down 44%, 57%, and 50%, respectively.
So what
In recent days, traders have congregated on social media sites like Reddit in an attempt to synchronize their purchases of heavily shorted stocks. Their goal was to quickly bid up their share prices so that short-sellers would suffer large losses.
The traders hoped this would spark massive short squeezes, during which short-sellers would be forced to exit their positions. To do so, they would need to buy back the stock they sold short. It's this forced selling pressure that can fuel a rapid ascent in the price of a highly shorted stock.
Investors suffered gruesome losses in GameStop, AMC Entertainment, and Express on Thursday. Image source: Getty Images.
Traders appeared to find success with this formula in GameStop, and then they replicated it with AMC and Express. Those who got in early earned huge returns -- for a while. Those who chose not to sell saw roughly half their gains evaporate on Thursday after trading platforms including Robinhood, TD Ameritrade, and Interactive Brokers put restrictions on trading in these and other heavily shorted stocks.
Now what
Brokerages that restricted trading drew a host of critics among individual investors and regulators alike. It's possible that some of them could lose customers, particularly Robinhood, which has gained millions of new users thanks in part to its promise to "level that playing field" for investors.
Yet the trading restrictions likely only accelerated the eventual downturn in shares of AMC, Express, and GameStop. Attempting to manipulate the stock prices of downtrodden companies is a recipe for disaster. Only those traders who buy and sell early have a chance of making money. And those who fail to do so can suffer devastating losses, as many of these company's shareholders experienced today.
