Twitter And Reddit Proved To Be Effective Arsenal For The Offensive Against Wall Street
The year 2021 was off to an interesting start in January, thanks to an interesting Robinhood narrative but an unusual twist. It also involved Wall Street as the usual villain, and this time the people took action. A bit of backstory, Wall Street has received multiple accusations of market manipulation in the past, with retail traders often getting the wrong end of the stick. Many protests have been staged, but this time, someone decided to take action.
Jaime Rogozinski created a subreddit called r/wallstreetbets in 2012 as a forum where people could share investing sentiments. He did not anticipate that it would become a global sensation years later. This is where Robinhood comes in. The online trading platform and a few others made it easier for retail traders to get into investing after eliminating some fees, paving the way for an influx of retail traders in 2020 during the pandemic.
Meanwhile, r/wallstreetbets had grown to more than 1 million members who were eager to take the fight to Wall Street, and that is where things got interesting. They realized that some hedge funds had singled out specific stocks, such as GameStop. Some hedge funds shorted the stock with the expectation that the company will eventually fail as digital game downloads gain favor over disc versions.
Wallstreetbets numbers rallied against hedge funds
The Reddit users on the r/wallstreetbets subreddit thread saw the short-bets against GameStop as a common trend that Wall Street uses to make money while unremorsefully causing the demise of many companies. This was enough to rally users to launch an offensive, with Reddit and Twitter being used as platforms to rally more people to join the movement.
The goal was to purchase GameStop stock forcing the price to go upwards. The movement was so successful that it forced the hedge funds into a short squeeze where they had to buy the stock to cut some of their losses, a move that gave more momentum to the stock price, causing it to skyrocket.
How Twitter and Reddit are gamifying the stock trading landscape
Traditional stock market investing relies on fundamental and technical analysis, but many people who trade this way often make losses. Fundamentals are not always a sure bet on how price will behave in the short-run or long-run. Wallstreetbets members knew that short bets are one of the ways that Wall Street influences the market, so they decided to launch an offensive.
The secret behind their success was that volumes largely influence the algorithms that fuel the stock market. Rallying about 4 million traders to buy stocks pushing up their price seemed to be quite effective against hedge fund stocks. Such a move has never been attempted before, but it did highlight the power of social media.
The Wallstreetbets movement was only possible because it managed to rally many traders to act in unison against Wall Street shorts regardless of the fundamentals. It highlights Twitter and Reddit’s power to rally masses into a hive mind that can become a formidable influential force.
How does gamification work?
Wallstreetbets uses a strategy that largely involves identifying stocks that have a structural weakness. Once they identify potential candidates, they purchase the stock options on the share in an attempt to force the price to go up, triggering a price surge. Robinhood and other commission-free apps make it easy for people to buy stock options and trade stocks.
When options are purchased in bulk, such as in the case of GameStop, market makers and hedge funds that have shorted the stock are forced to purchase the stock so they can avoid exposure. The hedging causes a price surge in the stock price, leading to more buying, which creates a feedback loop that pushes the price higher. The strategy allowed retail traders to trigger a phenomenon called gamma squeeze.
The members of Wallstreetbets looked for stocks with a limited number of shares in the market and heavy short interest from short sellers. The limited shares make it difficult for hedge funds and other short sellers to execute effective countermeasures.
The impact of the stock market gamification
Wallstreetbets’ largest impact was arguably shaking down Wall Street. However, it did trigger some quick regulatory action and calls for stringent measures against potential market manipulation measures. An interesting turn of events considering that retail traders executed the move as a reaction to alleged Wall Street’s market manipulation.
However, the move did yield significant upsides, including the fact that some retail traders cashed in from the gamma squeeze. Another notable impact is that gamification had a positive impact on some companies. AMC Entertainment Holdings, another stock that had been victim to Wall Street’s short trades, enjoyed substantial gains after Wallstreetbets used it similar to how it used GameStop. Interestingly, AMC Entertainment was headed for bankruptcy, but the massive buying and gamma squeeze gains allowed it to stay afloat.
Wallstreetbets seems to be supporting the survival of companies, while hedge funds seem to favor their demise of some unlucky companies that fall under the list of stocks to short. Unfortunately, while Twitter and Reddit present opportunities to rally the masses and leverage market opportunities through a hive-mind approach, such efforts might land you in trouble on the grounds of securities fraud. The U.S. Securities and Exchange Commission explores whether new rules are necessary to overcome the meme stock movement.
Keith Gill, one of the Redditors that hyped the GameStop price surge, was sued for securities fraud, but he denied the charges. Robinhood also found itself in trouble after regulators in Massachusetts filed a lawsuit against it for failing to put in adequate control measures despite marketing its platform to novice traders. It also received a lot of criticism from retail traders when it decided to suspend and limit trading. There were claims that investment funds paid it off because its actions paved the way for GameStop stock prices to crash, undoing most of the gains during the short squeeze. The trading platform denied allegations of being in cohorts with the short sellers.