Markets

GameStop's stock closes down more than 40% after brokers place restrictions on trades

Share
VIDEO9:3709:37
GameStop stock mania continues, and regulators are monitoring the action — Here's what the experts are watching

Shares of GameStop, the center of a trading frenzy fueled by a Reddit message board, dropped sharply on Thursday after brokers restricted trading on the stock.

GameStop closed at $193.60 per share, down 44.3% from Wednesday's closing price. Earlier in Thursday's session, the stock was up over 25% and down more than 60% and trading was halted several times.

Shares were soaring at one point in premarket trading, briefly topping $500. The stock started to fall as word spread that Robinhood and Interactive Brokers were restricting trading, and it opened the session solidly in the red.

The shares recovered and rallied only to turn rapidly lower as the day went on. It was the first decline in GameStop in six days and cut its gains for the week to just under 200%.

The wild moves followed a more than 130% rally on Wednesday in heavy volume. The stock was worth about $40 just a week ago.

Other speculative names with high levels of short interest also dropped sharply on Thursday. Shares of theater chain AMC Entertainment lost 57%, while Blackberry and Bed Bath and Beyond shed 42% an 36%, respectively.

The dramatic slide came as some retail brokerages limited trading in several of the heavily shorted names to closing positions only, meaning that traders could not buy up shares as the prices fell. Robinhood and Interactive Brokers also hiked their margin requirements on trades, making it harder for traders to use leverage to load up on stocks and options.

The brokers cited the extreme volatility as a reason for the moves, and Robinhood said it did not believe the dramatic price moves would stop "until the exchanges and regulators halt or put certain symbols into liquidation only."

Billionaire investor David Tepper told CNBC early Thursday that investors should be careful playing in speculative names.

"It was 'party on dot-com' in 1999 that screwed the shorts, and now it's 'gang up inc.' It didn't end well in 1999 when the dot-com bubble popped. Been there, done that. Old scars," Tepper told CNBC's Joe Kernen on "Squawk Box."

GameStop has been a red-hot target in the WallStreetBets Reddit chat room, where an army of at-home retail investors banded together in pushing shares higher and squeezing out short-selling hedge funds. The forum, which now has more than 4 million members, briefly went private Wednesday night as the moderators said they were "unable to ensure Reddit's content policy."

One trending post Thursday said "don't be scared of the drop in $GME $BB. Hedge funds trade after hours to scare y'all...KEEP BUYING AND HOLDING." The post quickly drew more than 1,000 comments in an hour.

Another top post in the community said "buy high, sell never," featuring a photo of GameStop.

Some of the passionate Reddit users have been sharing screenshots of their brokerage accounts, showing monstrous returns from trading in GameStop and other names.

"The action in GameStop's stock is a game of musical chairs and my advice for investors is to sell before the music stops," said David Trainer, CEO of New Constructs. "As fickle as the trading mob has been to select GameStop as one of their favorite stocks, they could be just as fickle as to when to let the stock drop."

The Reddit crowd started targeting other heavily shorted names including Bed Bath & Beyond and AMC Entertainment.

AMC skyrocketed 300% on Wednesday alone, bringing its weekly rally to over 450%. In the previous session, more than 1 billion shares changed hands in AMC, marking its highest volume day ever. Bed Bath & Beyond has also surged 75% this week. The duo fell sharply Thursday.

The extreme speculative behavior among rookie investors unnerved many on Wall Street worried that mounting losses by hedge funds could spill over to other areas of the market. Some also believe this buying frenzy could hurt overall market confidence and destabilize the conditions.

The S&P 500 and the Dow Jones Industrial Average suffered their biggest loss since October on Wednesday as concerns about the mania deepened, the equity market broadly rebounded on Thursday.

On Thursday, short sellers had a mark-to-market loss of $8.54 billion at GameStop's intraday high and a gain of $14.83 billion at the intraday low, a swing of more than $23 billion, according to S3 Partners.

Reddit co-founder Alexis Ohanian told CNBC on Thursday that GameStop's trading frenzy marked a turning point in the U.S. investing landscape.

"I do think this is a seminal moment. I don't think we go back to a world before this because these communities, they're a byproduct of the connected internet," Ohanian said in a "Squawk Box" interview. "Whether it's one platform or another, this is the new normal."

Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.