What happened
Shares of AMC Entertainment Holdings (NYSE: AMC) plunged on Tuesday as brokerages moved to end the trading frenzy in the volatile stock.
So what
In recent weeks, traders have used the WallStreetBets Reddit group and other social media sites to launch coordinated buying campaigns on a small number of heavily shorted stocks in hopes of igniting short squeezes. Several trading platforms soon found themselves unable to keep up with the soaring trading volumes -- and the corresponding regulatory deposits they were required to maintain.
In response, Robinhood and other brokerages imposed restrictions that limited investors' ability to buy shares of AMC and other volatile stocks in recent days.
AMC Entertainment's stock fell hard on Tuesday. Image source: Getty Images.
Traders thought they found a solution in Square's (NYSE: SQ) Cash App, which continued to give its users the ability to buy and sell shares of AMC. However, earlier today, Square said that Axos, the clearing broker that processes its trades, temporarily halted purchases of AMC stock.
Now what
The moves by brokerages and clearinghouses to limit trading in AMC artificially reduced demand for its shares, which, in turn, led to a sharp decline in its stock price. Yet that demand had been artificially inflated in the first place by traders seeking to capitalize on WallStreetBets-fueled short squeezes.
Ultimately, AMC's inflated share price did not reflect the true value of its struggling movie theater business. Thus, it was only a matter of time before AMC's stock price corrected. Today's decline may be just the beginning of a larger move toward finding a more reasonable price for AMC's shares.
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Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Square. The Motley Fool has a disclosure policy.
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