Trading Nation

With Reddit-backed investors storming the Street, traders decipher the gaming of GameStop

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Dow falls as Reddit-backed stocks soar. Trading the market divide

GameStop is seemingly unstoppable, at least temporarily.

Shares of the video game retailer and several other Reddit-anointed stocks soared higher in early Thursday trading as a community of young individual investors prolonged their war with professional money managers.

The action centers on short selling, a strategy in which investors borrow shares of a stock at a certain price expecting the market value to fall below that level when it's time to pay for the borrowed shares. GameStop, AMC and Bed Bath & Beyond are among the most heavily shorted stocks in the market.

In a short squeeze, a stock rises significantly above the target price, forcing short sellers to cover, or buy out of, their positions.

With several big hedge funds saying they had to cover their bets in GameStop due to the retail investor rush, regulation could be coming sooner rather than later, TradingAnalysis.com founder Todd Gordon told CNBC's "Trading Nation" on Wednesday.

Robinhood and Interactive Brokers said Thursday they have restricted trading in GameStop's stock and options on their platforms.

"There certainly needs to be regulation with GameStop," Gordon said, calling the mania a "huge distraction" from earnings season and the Big Tech bull market. "I just don't want these new investors to gamify the investing game too much."

At the same time, the flood of new buyers — particularly millennials and Generations Yers and Zers — could exact lasting change on the stock market, Gordon said.

"They have disposable income now, they're making money, they're starting to exert their influence and their beliefs on how this economy and how this country is going to act in the future, and I think it's good," he said, pointing to how investments in bitcoin, cannabis and solar energy have exploded in recent years.

"It's a battle against the establishment," Gordon said, emphasizing that retail investors are becoming more comfortable overlooking fundamentals in favor of visionary leadership, as they have in stocks such as Tesla.

"I think the new age of investors saying, 'Enough with establishment, enough with the textbooks,'" Gordon said. "I think the market is changing. They're saying, 'We are not going to miss pricing a visionary like Elon Musk properly,' and I've defended that bull case for years. And I think the new age of investors are saying, 'We need to kind of rewrite the rules here.'"

As those retail investors assert their place in the stock market "in a way we really haven't seen this century," it's on the financial industry to make sure they know the rules in the first place, Federated Hermes' Steve Chiavarone said in the same "Trading Nation" interview.

"Ultimately, the people that are involved in these trades have every right to do it, so long as they're not doing anything that's illegal or unethical. These are public markets and anyone has access to them," said Chiavarone, a portfolio manager, equity strategist and vice president at his firm.

Beyond regulation, the focus should be on these new investors putting their money to work in the public markets for the first time, Chiavarone said.

"Sure, if there's a portion of your portfolio that you want to trade on and you think you have skill, by all means," he said. "But I think rather than stand on our porch and yell for people to get off of our lawn, maybe a better approach here is to say, 'Hey, there's interest in the markets. There's interest in investing. That's good for our industry. That's good for these folks. How do we draw them in and give them the best chance of succeeding not just by hitting the jackpot on one stock, but by building a long term portfolio that's built to succeed?'"

That could come down to managers and advisors adjusting their own rules to fit the new landscape, he said.

"A lot of times, if you're a smaller money investor, there's a lot of wealth management shops that just simply won't take your account, or they won't give you a dedicated advisor," he said.

If the industry can refocus, attract millennial investors and show them how to construct portfolios that balance newer, riskier assets with more traditional investments and risk considerations, it can give them "an opportunity to have a better chance of long-term success," Chiavarone said.

"I think as an industry, we should encourage that," he said.

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