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WRAPUP 2-"We love this stock": GameStop effect spreads as calls for probe build

(Adds comments; updates with U.S. premarket moves)

Jan 28 (Reuters) - The battle between small-time traders and hedge funds that has shaken U.S. and European stock markets moved into Asia on Thursday, with surges in several Australian companies joining a list of social-media hyped moves that have cost financial institutions billions of dollars.

Heavily shorted Australian shares, including Webjet and Tassal Group, climbed more than 5% even as Sydney’s benchmark ASX 200 index fell 2%.

In New York, GameStop, the video game chain at the heart of the slugfest between Wall Street and Main Street, added another 37% in early trading after a two-week, 1,700% surge that has hammered fund investors who were betting the stock would fall.

Driven by an army of individual traders who work through online brokerage apps like Robinhood.com and discuss stocks on anonymous social media messaging boards, the dramatic jump in the stock price of companies including GameStop, BlackBerry Ltd and AMC Corp drew more calls for regulatory scrutiny from commentators.

“The frenzy raises all sorts of questions with respect to possible market manipulation,” said Michael Hewson, chief market analyst at retail broker CMC Markets UK.

“It is already illegal for institutions to coordinate in the manner currently being seen in moving prices on these stocks, raising questions about the legality of what is currently taking place right now on these forums.”

The short squeeze - where traders have to abandon loss-making “short” bets on a stock falling because it has instead risen - also fueled a 2% slide in the benchmark S&P 500 on Wednesday as investors sold other assets to cover their losses.

Futures tracking the main New York index were down another 0.6% on Thursday.

Reddit discussion threads were again humming with chatter about the stocks on Thursday as membership of the trader-focused group WallStreetBets raced past 4 million.

In one discussion, thousands of participants responded “We love this stock” to a post that called for more buying of GameStop and cast retail traders as Iron Man against a hedge fund Thanos in a nod to the superhero movie “Avengers: Endgame”.

BlackBerry and Nokia, however, slipped more than 5% in premarket trading after recording hefty gains this week and derivatives positioning pointed to a greater rise in the number of orders betting GameStop would fall.

“The idea that this is about hedge fund short-sellers transferring funds to a mass of ordinary retail buyers is a compelling story,” said Paul Donovan, chief economist of UBS Global Wealth Management.

“But it is also a story that is unlikely to hold true beyond the brief period of the frenzy.”

GAME ON

The war began last week when famed short seller Andrew Left of Citron Capital bet against GameStop and was met with a barrage of retail traders betting the other way. He said on Wednesday he had abandoned the bet.

Regarded by market professionals as “dumb money”, the pack of traders, some of them former bankers working for themselves, have become an increasingly powerful force worth 20% of equity orders last year, data from Swiss bank UBS showed.

The only-way-is-up nature of stock markets over the past decade, fueled by a constant flow of newly created money from major central banks, has also made it less risky to bet on shares rising.

The U.S. Federal Reserve kept those taps firmly open at its latest meeting on Wednesday.

This week’s turmoil caught the attention of the White House, with President Joe Biden’s economic team - including Treasury Secretary Janet Yellen on her first full day on the job on Wednesday - “monitoring the situation.”

Massachusetts state regulator William Galvin called on NYSE to suspend trading in GameStop for 30 days to allow a cooling-off period.

“The prospect of intervention here is clearly high, but this will just galvanize the (WallStreetBets) community as it just brings home the feeling of inequality in financial markets,” said Chris Weston, head of research at broker Pepperstone in Melbourne.

“It’s fine to prop up zombie companies through Fed actions but if retail follows a path that greatly distorts asset prices by targeting short sellers, then this gets shut down.”

Reddit said on Wednesday that it had not been contacted by authorities over the surges.

Reporting by Sagarika Jaisinghani, Nikhil Nainan and Sruthi Shankar in Bengaluru, Saqib Iqbal Ahmed and April Joyner in New York; and Thyagaraju Adinarayan in London Writing by Patrick Graham; Editing by Saumyadeb Chakrabarty

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