Here’s why AMC’s stock surge is different than GameStop

Published Thu, Jun 3 202112:41 PM EDTUpdated Thu, Jun 3 20212:06 PM EDT

The wild trading in AMC Entertainment is giving investors flashbacks of the GameStop saga earlier this year that blew up hedge funds and caused turmoil on Wall Street. However, the recent frenzy doesn't appear to have the same force behind it and likely won't trigger the same ripple effects. So far, there have been no signs of liquidity issues at any hedge fund or brokerage firm amid the massive rally in AMC driven by meme-obsessed retail traders. During the historic GameStop short squeeze, hedge fund Melvin Capital got caught short and suffered multibillion-dollar losses, while popular brokerage Robinhood rushed to raise new funds to meet liquidity requirements. This sparked fears of overall financial stability and jolted volatility in the broader market. "AMC, while very interesting and exciting to watch, at this point doesn't pose the same threat that GameStop did," The Sevens Report founder Tom Essaye said. "We haven't heard of any funds or brokerages exhibiting stress because of it. We hope that everybody learned their lesson from GameStop." The trading mania in January forced Robinhood to tap credit lines, raise new funds and throttle back trading in several short-squeezed names. The trading platform said then the central Wall Street clearinghouse mandated a ten-fold increase in the firm's deposit requirements to ensure smooth settlements in trades. Meanwhile, Melvin Capital took a huge loss in GameStop, raising concerns that the hedge fund could potentially go under. Citadel and Point72 ended up infusing close to $3 billion into the fund to shore up its finances. "In the case of AMC, the market generally doesn't have to learn the same lesson twice," Essaye said. "I'd imagine any of those firms and brokerages that survived or got a scare from GameStop are now taking measures to insolate themselves from some of that risk." AMC's stock has soared nearly 140% this week through Wednesday's close as retail traders doubled down on the struggling movie theater chain. The stock was down about 8% on Thursday after the company announced it plans to sell more than 11 million shares amid the trading frenzy. AMC later said it completed the stock sale, raising $587 million . AMC's short interest, while well above the average U.S. stock, is nowhere near GameStop's level during the trading mania. AMC has around 18% of its float shares sold short, according to data from S3 Partners. GameStop had in January more than 130% of its shares borrowed and sold short. Moreover, the broader market has been in a holding pattern for the past two weeks as the S & P 500 sits less than 1% from its all-time high. Investors are largely in wait-and-see mode until Friday's May jobs report. Wall Street is also awaiting more signaling from the Federal Reserve about its approach to tapering monetary policy. So there could have been an outsized focus on AMC as of late given the lack of market-moving events. Still, some say history could repeat itself with short sellers getting burned by the manic speculative trading. If losses in hedge funds betting against the stock mount, there could be a pullback in risk-taking across Wall Street that could hit the overall market. On Wednesday, short-sellers betting against the stock lost $2.8 billion as the shares surged 95%, according to S3 Partners. That brings their year-to-date losses to more than $5 billion, S3 data showed. "It's no different outside of the high profile hedge funds that got caught short in February but I'm sure some got caught again this time around too," Bleakley Advisory Group chief investment officer Peter Boockvar said. "We've seen this type of behavior many times in the history of markets and this is no different and will eventual flame out as all manias do."

A sign hangs in front of an AMC theater on January 27, 2021 in Chicago, Illinois. Shares of AMC Entertainment more than quadrupled today as investors continue their buying spree on heavily shorted stocks.

Scott Olson | Getty Images

So far, there have been no signs of liquidity issues at any hedge fund or brokerage firm amid the massive rally in AMC driven by meme-obsessed retail traders.

During the historic GameStop short squeeze, hedge fund Melvin Capital got caught short and suffered multibillion-dollar losses, while popular brokerage Robinhood rushed to raise new funds to meet liquidity requirements. This sparked fears of overall financial stability and jolted volatility in the broader market.