Shares of GameStop Corp and others favored recently by retail investors fell further on Thursday, while US Treasury Secretary Janet Yellen said she needed to "understand deeply" the trading frenzy that has gripped Wall Street.
A swarm of buying by amateur traders over the past two weeks sparked big moves in shares of companies that hedge funds had bet against. Some framed it as a battle between Wall Street and Main Street.
Many of the so-called "Reddit rally" stocks fell sharply this week. GameStop shares closed Thursday down 42 percent at $53.50, far from their peak of $483 a week ago. AMC Entertainment has lost about two-thirds of its value after two weeks of wild swings.
The family behind Koss Corp and some of the headphone maker's top executives raked in about $45 million from a surging stock price during the rally.
Kim Forrest, chief investment officer at Bokeh Capital Partners in Pittsburgh, said retail investors who got burned buying at the highs were likely to be more cautious bidding up shares of companies with a high short interest.
Retail investors "can see that this is a roller-coaster ride and not a one-way trip up, and that's probably given them a little more pause before pushing the buy button."
Some investors may once again be setting their sights on stocks they believe are overvalued.
Health insurance startup Clover Health, which is backed by venture capitalist Chamath Palihapitiya, ended down 12 percent after it was criticized in a report by Hindenburg Research.
On WallStreetBets, the Reddit forum at the center of the squeeze that has hurt hedge funds and other "short" sellers, some denizens urged each other to hold the line and not sell GameStop. Others expressed frustration at the stock's big drop.
“It’s funny how everyone on here is telling others to hold but stock keeps falling meaning y’all are actually selling,” said a user with the handle the_undergroundman. “You’re getting played by your own brethren.”
Despite this week's declines, GameStop shares remain up 184 percent so far in 2021, AMC up over 200% and Koss over 400 percent year to date.
Ahead of the Thursday meeting, Yellen said on ABC's "Good Morning America" that she and other regulators were seeking to "understand deeply" what had happened before considering action.
Yellen was to meet with heads of the U.S. Securities and Exchange Commission (SEC), Federal Reserve Board, Federal Reserve Bank of New York and Commodity Futures Trading Commission.
Analysts said they would likely look at online forums where mass buying of GameStop and AMC was discussed last week, and on the ever-larger role of hedge funds in financial markets.
"Any kind of market distortion by investors agreeing to cause the distortion goes against the smooth and transparent functioning of markets," said Andrea Cicione, head of strategy at TS Lombard.
"The reason this might not be covered by regulation yet is simply because it has never happened before. But now it might find its way into regulation in a more explicit way."
Credit rating agency Fitch said late Thursday that U.S. financial institutions face second order effects from GameStop volatility and that social media raises retail investors' impact, which may have long-term implications for financial firms.
Cleveland Federal Reserve President Loretta Mester told CNBC she does not see the Fed making any adjustments in reaction to the GameStop frenzy.
The SEC is reviewing social media posts for signs of potential fraud, Bloomberg News reported.
At least a dozen proposed class-action lawsuits accuse brokerage app Robinhood of breaching its contract with customers when it restricted trading last week.
Hindenburg, which called Clover a "broken business" in the title of its report, said it had taken no short or long investment position - market code for a bet on the company's shares. The group added it was important investors understood the role of short-sellers and their research.
Famous as an early Facebook executive and minority owner of the Golden State Warriors basketball team, Palihapitiya was among the tech sector billionaires who encouraged the GameStop trade last month by saying he had bought into the shares.
Meanwhile, Tesla Inc Chief Executive Elon Musk tweeted his support for cryptocurrency Dogecoin, sending its value surging more than 50 percent. Musk's tweets about certain companies, including GameStop, and cryptocurrencies have contributed to the recent rally.
Many analysts think the "short squeeze" is over and market attention has begun to turn to possible fallout. The number of GameStop shares shorted edged lower, according to the latest data from analytics firm S3 Partners.
"The retail frenzy that provided an unusual distraction over the last couple of weeks appears to have lost momentum," said Craig Erlam, market analyst at OANDA Europe.
"A comeback tour may be planned at some point in the not-too-distant future but whether it will be as effective, we'll have to wait and see."
(Reporting by Tom Westbrook in Singapore, Susan Mathew and Sagarika Jaisinghani in Bengaluru, Joice Alves in London and Aleksandra Michalska in New York, additional writing by Lewis Krauskopf and Alden Bentley; editing by Saumyadeb Chakrabarty, Nick Zieminski and David Gregorio)