tag:theconversation.com,2011:/uk/topics/gamestop-99332/articlesGameStop – The Conversation2023-09-21T15:01:42Ztag:theconversation.com,2011:article/2140772023-09-21T15:01:42Z2023-09-21T15:01:42ZDumb Money really does show how the little guys won against Wall Street – a ‘meme stock mania’ expert explains<p>Drawing inspiration from <a href="https://theconversation.com/the-first-amendment-will-likely-protect-the-anonymity-of-redditors-who-discussed-gamestop-stock-154448">the real-life 1,800% spike in the value of GameStop shares</a> in 2021, Dumb Money deftly explains the drivers of “meme stock mania” – when groups of investors on social media herd together to cause certain stocks to rocket. </p>
<p>The “dumb money” of the film’s title is a reference to these amateur or retail investors. At the height of the meme stock craze, these “little guys” worked together to upend the tactics of global hedge fund giants, which were using their billions to short-sell stocks. This is when investors try to drive down the value of a company’s shares because they’ve essentially bet against it rising in price.</p>
<p>Retail investors, by purchasing and holding <a href="https://tradingeconomics.com/gme:us">shares of US computer game shop GameStop</a>, drove the price up from approximately $19 (£15.50) at the beginning of January 2021 to <a href="https://en.wikipedia.org/wiki/GameStop_short_squeeze">$325 (£265) per share</a> by the end of the month. While <a href="https://www.cnbc.com/2022/01/19/how-much-money-youd-have-if-you-invested-1000-dollars-in-gamestop-in-2021.html">the little guys profited</a>, this contributed to <a href="https://www.ai-cio.com/news/gamestops-robinhood-boosters-clobbering-hedge-funds/">losses nearing $25bn</a> for the hedge funds and other “big guys” who had been shorting these stocks.</p>
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<a href="https://theconversation.com/gamestop-im-one-of-the-wallstreetbets-degenerates-heres-why-retail-trading-craze-is-just-getting-started-154584">GameStop: I'm one of the WallStreetBets 'degenerates' – here's why retail trading craze is just getting started</a>
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<p>For any viewers worried about having little knowledge or interest in retail investing, this comedy manages to explain the rise of GameStop shares – and meme stock mania – without overwhelming or complex financial jargon. And you don’t have to watch Margot Robbie explain everything from a bubble bath either, a tactic <a href="https://graziamagazine.com/articles/margot-robbie-bathtub-big-short-gamestop-stocks/">The Big Short</a> (2015) previously employed. </p>
<p>Yet Dumb Money still captures the intricacies of the investment chatter or “sentiment” that drove GameStop shares “<a href="https://www.dexerto.com/business/how-wallstreetbets-took-gamestop-to-the-moon-timeline-1503672/">to the Moon</a>” (as Reddit users said at the time). It does this by telling multiple parallel stories of members of the army of retail investors who held GameStop stock at the time. This helps show how their interactions on investment forums like the <a href="https://www.reddit.com/r/wallstreetbets/">WallStreetBets</a> subreddit were behind the stock’s rally. </p>
<p>Throughout, Dumb Money uses realistic language of meme stock investors. I know this because my colleagues and I <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/fire.12328#:%7E:text=Our%20results%20indicate%20that%20Reddit,discussion%20in%20GameStop's%20price%20rally.">analysed 10.8m Reddit comments</a> to confirm the platform’s influence over meme stock share prices. In particular, we looked at the language that real-life Reddit investors use. Dumb Money effectively captures their distinctive, often offensive tone. </p>
<p><strong>Frequently used words by retail investors on Reddit forums:</strong></p>
<h2>Rooting for the little guys</h2>
<p>In the movie, Gabe Plotkin (played by Seth Rogen) – the real-life founder of hedge fund Melvin Capital Management, which has $3.5 billion under management – says retail investors always lose. But GameStop was an exception. It shows “dumb money” is worth analysing.</p>
<p>And it’s hard not to root for the little guys when watching Dumb Money. These amateur investors included single mothers juggling work and parenting responsibilities, and university students graduating with massive debts and struggling to find employment. The wealth disparity of the retail investors compared with the rich hedge fund managers is made clear.</p>
<p>Dumb Money also argues that the frustration of being trapped in debt and poverty played a significant role in the GameStop rally. Having the COVID-19 pandemic in the background adds to this frustration and makes all the stories even more relatable, while also trying to explain why the rally happened when it did. </p>
<p>The evidence from existing studies about the impact of the pandemic on retail investors is highly inconsistent, however. For example, in cryptocurrency markets, which are in many ways similar to meme stocks as they attract amateur investors via social media, my research shows <a href="https://www.sciencedirect.com/science/article/pii/S1042443121000408">the pandemic did not cause “herding”</a> behaviour (when small investors copy each other).</p>
<p>And while the money might be considered “dumb”, main character Keith Gill (known online as <a href="https://www.youtube.com/c/roaringkitty">Roaring Kitty</a>, where he posts “educational livestreams” about investing) is clearly anything but. </p>
<p>Gill was an amateur investor and a leading figure online during the meme stock craze. The film portrays his human side beautifully, contrasting the support he gets from his wife with the initial scepticism about his investing by family members. It also highlights his unwavering belief in the power of community and social networks in driving financial markets, and how this could be overtaking the role of tracking “fundamentals” – such as company profitability, growth potential and liabilities. </p>
<p>In one scene based on real life, Gill has to testify to the US House of Representatives Committee on Financial Services. While practising his speech in advance, he forgets one of the reasons he has come up with for explaining the GameStop investment rationale.</p>
<p>This is a nod to the real driving force behind social media sentiment, <a href="https://www.marketwatch.com/story/top-9-takeaways-from-the-gamestop-hearing-11613758274">summed up by Gill</a> during the hearing when he gives his reason for investing in GameStop: “<a href="https://onlinelibrary.wiley.com/doi/full/10.1111/fire.12328">I just like the stock</a>.” </p>
<p>As GameStop and other meme stocks show, this kind of gut feeling can sometimes carry more weight than the most complex financial analysis conducted by hedge funds. </p>
<p>A similar pattern of emotional investment can be seen among crypto investors. <a href="https://www.sciencedirect.com/science/article/abs/pii/S0929119920302030">There is research</a> to suggest that amateur investors purchase shares of companies with the terms “crypto” or “blockchain” in their names without even verifying whether these companies are using these emerging technologies.</p>
<p>The movie villains at the opposite end of the wealth spectrum – the titans of Wall Street brought low by the redditors – are, strikingly, portrayed with the same sense of humour and humanity as Gill. Ultimately, all of the characters share a love and appreciation for money – although they are dealing with different amounts and concerns, of course. </p>
<p>And while the big guys still tend to win on Wall Street, anyone who is sceptical about the growing significance of social media sentiment in driving financial markets should give Dumb Money a watch. It may open their minds to ideas that initially appear dumb, but can ultimately prove to be powerful.</p><img src="https://counter.theconversation.com/content/214077/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Larisa Yarovaya does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Dumb Money depicts the real-life GameStop short squeeze that fuelled the ‘meme stock’ trend.Larisa Yarovaya, Deputy Head of the Centre for Digital Finance, Associate Professor in Finance, University of SouthamptonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1901182022-10-06T16:34:29Z2022-10-06T16:34:29ZFrom GameStop to crypto: how to protect yourself from meme stock mania<figure><img src="https://images.theconversation.com/files/486250/original/file-20220923-11-m4it8b.jpg?ixlib=rb-1.1.0&rect=40%2C60%2C6669%2C4406&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Meme stocks are investment assets that receive a lot of attention on social media.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/meme-stock-investment-warning-concept-smart-1997924141">Jirsak / Shutterstock</a></span></figcaption></figure><p>Recent <a href="https://www.southampton.ac.uk/news/2021/01/larisa-yarovaya-gamestop-crypto-exuberance.page">rallies</a> in stocks popularised on social media have attracted increasing numbers of investors looking to these so-called “meme stocks” for quick returns. But while it might look like a fun game, there are real risks to investing in stocks and other financial products popularised on social media. And with <a href="https://www.cnbc.com/2022/09/23/uk-government-dishes-out-tax-cuts-as-country-braces-for-recession.html">recessions</a> looming <a href="https://www.bbc.co.uk/news/business-62976318">around</a> the world, the danger is becoming even more acute.</p>
<p>The term meme stock was traditionally used to describe any share that receives a lot of attention on social media. One of the more notable recent examples of a meme stock, retailer GameStop, saw its stock soar <a href="https://www.theguardian.com/business/2022/aug/13/meme-stock-frenzy-gamestop-bed-bath-beyond-amc">by more than 10,600%</a> in 2021 following discussions by individual investors on r/WallStreetBets – a popular subreddit on the Reddit social media platform. You’ve probably heard about other <a href="https://edition.cnn.com/2022/05/12/investing/gamestop-amc-meme-stocks/index.html">instances</a> of assets popularised on social media of late, including cinema chain AMC and US retailer Bed Bath & Beyond. </p>
<p>Meme stock rallies <a href="https://blockworks.co/meme-stocks-are-back-and-theyve-brought-dogecoin-and-shiba-inu/">have also boosted</a> cryptocurrency products, such as <a href="https://www.investopedia.com/terms/s/stablecoin.asp">stablecoins</a> and <a href="https://www.theverge.com/22310188/nft-explainer-what-is-blockchain-crypto-art-faq">non-fungible tokens</a> – basically any assets for which hype has been built online. And while these new decentralised finance assets <a href="https://www.sciencedirect.com/science/article/pii/S1044028322000217">are very different to stocks</a>, the way sentiment is formed about these assets on social media tends to be the same. </p>
<p><a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3822315">Recent research</a> I carried out with colleagues aimed to understand the role of Reddit in the GameStop share rally involved a textual analysis of 10.8 million comments on r/WallStreetBets and high-frequency GameStop prices. What we found sends a warning signal to all meme stock investors: online chatter pushes prices up but can’t save investors when asset values start to collapse.</p>
<p>Our analysis showed that online discussions – or “net sentiments”, as shown in the chart below – on r/WallStreetBets helped to initiate GameStop’s price growth and caused a spike in trading volumes during the bullish market for this stock when the hype was high.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/484082/original/file-20220912-14-rurrnp.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Line chart showing trading volumes for GameStop stock (blue) and online discussion of the stock (red)." src="https://images.theconversation.com/files/484082/original/file-20220912-14-rurrnp.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/484082/original/file-20220912-14-rurrnp.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=423&fit=crop&dpr=1 600w, https://images.theconversation.com/files/484082/original/file-20220912-14-rurrnp.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=423&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/484082/original/file-20220912-14-rurrnp.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=423&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/484082/original/file-20220912-14-rurrnp.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=532&fit=crop&dpr=1 754w, https://images.theconversation.com/files/484082/original/file-20220912-14-rurrnp.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=532&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/484082/original/file-20220912-14-rurrnp.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=532&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Online discussion of GameStop by investors versus trading volume (data taken at 30 minute intervals) in January and February 2021.</span>
<span class="attribution"><span class="source">Author's chart using data from Bloomberg and Reddit.</span></span>
</figcaption>
</figure>
<p>But we found that positive comments by people on Reddit could not prevent GameStop from falling when people started selling. In early February 2021, online sentiment was growing, that is, there were more positive comments about GameStop than negative on r/WallStreetBets, even as investor returns for GameStop stock (recorded at 30-minute intervals for our research) kept falling and trading volume decreased.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/484080/original/file-20220912-6431-mvs4db.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Line chart showing returns (blue & red) and online discussion (green) about GameStock shares." src="https://images.theconversation.com/files/484080/original/file-20220912-6431-mvs4db.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/484080/original/file-20220912-6431-mvs4db.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=381&fit=crop&dpr=1 600w, https://images.theconversation.com/files/484080/original/file-20220912-6431-mvs4db.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=381&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/484080/original/file-20220912-6431-mvs4db.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=381&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/484080/original/file-20220912-6431-mvs4db.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=479&fit=crop&dpr=1 754w, https://images.theconversation.com/files/484080/original/file-20220912-6431-mvs4db.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=479&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/484080/original/file-20220912-6431-mvs4db.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=479&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Online discussion of GameStop versus investment returns for the stock taken at 30 minute intervals.</span>
<span class="attribution"><span class="source">Author's own chart using data from Bloomberg and Reddit.</span></span>
</figcaption>
</figure>
<p>Investors should learn a lesson from the GameStop story. When online commenters are trying to hype a stock, they will often add hashtags such as “to the moon” and HODL (a misspelling of “Hold” – as in hold the stock rather than sell – that has become an acronym for <a href="https://www.investopedia.com/terms/h/hodl.asp#:%7E:text=HODL%20is%20an%20acronym%20for,user%20on%20an%20online%20forum.">hold on for dear life</a> in the online trading world). But if the price starts falling, it does not matter how many of these hashtags are in the comments on a subreddit, our research shows the wider market reaction to the price decline will outweigh any encouragement made on investment forums. </p>
<h2>Don’t believe the hype</h2>
<p>Social media often feeds <a href="https://sdg.com/webinars/overconfidence-confirmation-bias-business-decisions/#:%7E:text=Confirmation%20bias%2C%20where%20we%20tend,cause%20of%20many%20decision%20failures.">both overconfidence and confirmation biases</a> – probably the most common <a href="https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/behavioral-finance/">cognitive biases</a> in business and finance. When reading investment forums, amateur investors are often searching for confirmation of their own decision to invest in a meme stock. These investors then often simply feed each other’s biases by sharing information that confirms this desirable outcome.</p>
<p>And there is even more risk involved in investing in cryptocurrencies versus equities. Crypto markets <a href="https://cointelegraph.com/news/a-brief-history-of-bitcoin-crashes-and-bear-markets-2009-2022">are volatile</a> and lack sufficient regulation to make them more stable. The recent <a href="https://www.ft.com/content/5a3b6fe9-329c-4c97-9f2b-3b00edeb0618">collapse of Terra Luna </a>, for example, saw individual investors <a href="https://www.theguardian.com/technology/2022/jul/12/they-couldnt-even-scream-any-more-they-were-just-sobbing-the-amateur-investors-ruined-by-the-crypto-crash">lose their savings</a> after investing in the algorithmic stablecoin. </p>
<p>With inflation climbing amid an energy and cost of living crisis, the cryptocurrency market has struggled to recover quickly from its most recent collapse, with the market leader <a href="https://www.ft.com/content/14cfb2cb-79f4-4ef9-ad08-11264175ed9f">Bitcoin losing 70% of its value since November 2021</a>. But even these factors have not deterred amateur investors from seeking returns in crypto markets. </p>
<p>Aside from waiting for governments to tighten crypto regulation – as is planned in <a href="https://www.ft.com/content/7cf1f46b-00b3-4af8-997a-90efb72bfb02">Singapore</a>, for example – there are a few steps that retail investors can take to protect themselves from meme-stock mania. </p>
<p><strong>1. Beware when something sounds too good to be true</strong></p>
<p>If an asset or stablecoin claims to be low risk, but investors are bragging about enormous returns made in no time, this is a red flag. Such claims are usually too good to be true, since there are no risk-free assets that can offer high returns. Investors should check the yields of <a href="https://www.cnbc.com/quotes/US3M">the US three-month Treasury bills</a> to shape their expectations of potential low-risk returns. </p>
<p><strong>2. Carefully consider a range of information</strong></p>
<p>It does not help to read ten articles that support your own opinion and quickly scan through headlines that suggest the alternative. Consumers have learned to be more wary about promises of unrealistic and scientifically impossible results for all kinds of products – a similar precaution should apply to investments.</p>
<p><strong>3. Pay attention to sources</strong></p>
<p>If an article or analyst’s opinion has been sponsored by a crypto firm or exchange, this information is the same as any other paid-for advertisement. Investment forums and social media are not trustworthy sources of investment tips either, they are full of bots and can be used as an inexpensive marketing tool for crypto firms looking to manipulate the market. </p>
<p>As shown by <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3822315">recent research</a> on GameStop, social media is very effective at sparking extreme rallies in a meme stock, but it does not protect retail investors when the price drops back to its fair value.</p><img src="https://counter.theconversation.com/content/190118/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Larisa Yarovaya does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Meme stock investing might seem like a fun game, but the risks are real.Larisa Yarovaya, Deputy Head of the Centre for Digital Finance, Associate Professor in Finance, University of SouthamptonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1595632021-04-26T10:24:52Z2021-04-26T10:24:52ZNFTs are much bigger than an art fad – here’s how they could change the world<figure><img src="https://images.theconversation.com/files/396590/original/file-20210422-21-1ovoydj.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Homes fit for zeroes (and ones).</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/3d-illustration-abstract-background-real-estate-1933952156">Julien Tromeur</a></span></figcaption></figure><p>Sotheby’s has become the latest establishment name in art to dive into NFTs (non-fungible tokens) through its collaboration with anonymous <a href="https://www.one37pm.com/nft/art/meet-murat-pak-digital-artist">digital artist Pak</a> and NFT marketplace <a href="https://niftygateway.com/">Nifty Gateway</a>. </p>
<p>The auction house sold <a href="https://www.sothebys.com/en/digital-catalogues/the-fungible-collection-by-pak?locale=en&cmp=actn_CTP_gg_sea_tffc_onl_nft_pak_fungible_en_04-2021_int__ovr_searesp___general&s_kwcid=AL!13028!3!513206057188!p!!g!!sotheby%27s%20nft%20auction">The Fungible Collection</a>, a “novel collection of digital art redefining our understanding of value”, for more than <a href="https://www.sothebys.com/en/articles/17-million-realized-in-sothebys-first-nft-sale-with-digital-creator-pak?locale=en">US$17 million</a> (£12 million). </p>
<p>Some pieces, such as “The Switch”, a monochrome 3D construction that is going to be changed by the artist at some unspecified moment in the future, received bids well in excess of <a href="https://niftygateway.com/itemdetail/primary/0xc7cc3e8c6b69dc272ccf64cbff4b7503cbf7c1c5/2">US$1 million</a>.</p>
<p><a href="https://theconversation.com/what-are-nfts-and-why-are-people-paying-millions-for-them-157035">For the uninitiated</a>, NFTs are tokenised versions of assets that can be traded on a blockchain, the digital ledger technology behind cryptocurrencies like bitcoin and ethereum. Whereas one bitcoin is directly interchangeable with another, meaning they are fungible, NFTs are the opposite because the underlying assets are unique in some way and can’t be exchanged like for like. </p>
<p>This uniqueness enabled Christie’s to sell digital artist Beeple’s
<a href="https://www.cnbc.com/2021/03/11/most-expensive-nft-ever-sold-auctions-for-over-60-million.html">“Everydays”</a> NFT in March for an eye-watering US$68 million. For those that don’t have that sort of money, NFTs are also being used for trading collectables like <a href="https://www.sportspromedia.com/news/topps-mlb-baseball-card-nfts-digital-collectibles">baseball cards</a> and <a href="https://www.financemagnates.com/cryptocurrency/news/nfts-are-creating-robust-economies-in-online-gaming-heres-how/">computer gaming items</a> like swords and avatar skins. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/396517/original/file-20210422-23-ye7ltk.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="The Switch, by Pak" src="https://images.theconversation.com/files/396517/original/file-20210422-23-ye7ltk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/396517/original/file-20210422-23-ye7ltk.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=572&fit=crop&dpr=1 600w, https://images.theconversation.com/files/396517/original/file-20210422-23-ye7ltk.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=572&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/396517/original/file-20210422-23-ye7ltk.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=572&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/396517/original/file-20210422-23-ye7ltk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=719&fit=crop&dpr=1 754w, https://images.theconversation.com/files/396517/original/file-20210422-23-ye7ltk.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=719&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/396517/original/file-20210422-23-ye7ltk.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=719&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The Switch, by Pak.</span>
<span class="attribution"><a class="source" href="https://www.sothebys.com/en/digital-catalogues/the-fungible-collection-by-pak">Sotheby's</a></span>
</figcaption>
</figure>
<h2>Bubble trouble?</h2>
<p>The excitement around NFTs feeds a similar narrative to other recent price surges such as <a href="https://theconversation.com/gamestop-hedge-fund-attacks-have-opened-up-powerful-new-front-against-wall-street-154284">GameStop</a> and <a href="https://theconversation.com/after-gamestop-the-rise-of-dogecoin-shows-us-how-memes-can-move-markets-154470">dogecoin</a>, in that these are <a href="https://www.cnbc.com/video/2021/03/22/lse-law-professor-on-nft-craze-this-is-a-huge-bubble.html">speculative bubbles</a> brought about by <a href="https://www.bloomberg.com/news/articles/2021-04-03/nft-price-crash-stirs-debate-on-whether-stimulus-led-fad-is-over?sref=jKx7unHh">stimulus cheques</a> in the US, lockdown boredom and low interest rates. </p>
<p>Look no further than <a href="https://www.msn.com/en-gb/money/technology/nfts-how-celebrities-sell-crypto-digital-artworks-for-millions-and-why-people-are-angry-about-them/ar-BB1e9OJQ">celebrities like</a> music star Grimes and YouTuber Logan Paul releasing their own flagship NFTs to ride the wave. Even Vignesh Sundaresan, the entrepreneur who bought Beeple’s record-breaking artwork, <a href="https://www.cnbc.com/2021/04/07/buyer-of-69-million-dollar-beeple-art-metakovan-on-nfts.html">sees investing</a> in NFTs as a “huge risk” and “even crazier than investing in crypto”.</p>
<p>But history also tells us to be careful about dismissing NFTs as a passing fad, since the importance of technological innovations often becomes clearer once the hype dies down. Many commentators dismissed the influx of tech companies around the dotcom bubble of the late 1990s, and the first wave of mass cryptocurrency enthusiasm in 2017, only to be proven hopelessly wrong when Amazon and bitcoin re-emerged. </p>
<p>NFTs themselves are actually well down from their highs, with a <a href="https://www.bloomberg.com/news/articles/2021-04-03/nft-price-crash-stirs-debate-on-whether-stimulus-led-fad-is-over">70% drop</a> in average price since February. Perhaps this is less the bursting of a bubble than a “weeding out” of gimmicky tokens now that the initial hype has begun to die down. </p>
<p>This phenomenon is captured well in US consultancy Gartner’s <a href="https://www.gartner.com/en/research/methodologies/gartner-hype-cycle">hype cycle</a>, which illustrates the typical progression of a new technology. With NFTs, we are probably emerging from the “peak of inflated expectations” on a journey towards the same “plateau of productivity” that Amazon reached a long time ago. </p>
<p><strong>Gartner’s hype cycle</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/396539/original/file-20210422-17-lyco96.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Gartner's hype cycle" src="https://images.theconversation.com/files/396539/original/file-20210422-17-lyco96.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/396539/original/file-20210422-17-lyco96.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=405&fit=crop&dpr=1 600w, https://images.theconversation.com/files/396539/original/file-20210422-17-lyco96.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=405&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/396539/original/file-20210422-17-lyco96.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=405&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/396539/original/file-20210422-17-lyco96.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=509&fit=crop&dpr=1 754w, https://images.theconversation.com/files/396539/original/file-20210422-17-lyco96.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=509&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/396539/original/file-20210422-17-lyco96.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=509&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.gartner.com/en/research/methodologies/gartner-hype-cycle">Gartner</a></span>
</figcaption>
</figure>
<p>This ties in with what Austrian economist Joseph Schumpeter said about why capitalism works. Schumpeter viewed capitalism as a relentless churn of old into new, as the latest and most innovative enterprises replace those that came before – he called this “<a href="https://www.investopedia.com/terms/c/creativedestruction.asp">creative destruction</a>”. </p>
<p>In this light, NFTs are the newcomers challenging how we perceive and register ownership of assets. And the tension between <a href="https://academic.oup.com/spp/article-abstract/46/4/632/5396727?redirectedFrom=fulltext">innovation and incumbency</a> also <a href="https://www.weforum.org/agenda/2016/07/why-do-people-resist-new-technologies-history-has-answer/">contributes to</a> the scepticism that always surrounds such new technologies. </p>
<h2>What happens next</h2>
<p>NFTs create opportunities for new business models that didn’t exist before. Artists can attach stipulations to an NFT that ensures they get some of the proceeds every time it gets resold, meaning they benefit if their work increases in value. Admittedly football teams have <a href="https://theathletic.co.uk/2134724/2020/10/14/sell-on-fees-ollie-watkins-ben-godfrey-exeter-york/">been using</a> similar contractual clauses when selling on players for a while, but NFTs remove the need to track an asset’s progress and enforce such entitlements on each sale. </p>
<p>New art platforms, such as <a href="https://www.niio.com/site/">Niio Art</a>, are able to demonstrate in a really simple way that they own digital works. When customers borrow or buy art from the platform, they can display it on a screen in the knowledge that there is no issue with copyright or originality because the NFT and blockchain ensures that ownership is authentic. </p>
<p>NFTs give musicians the potential <a href="https://www.rollingstone.com/pro/news/kings-of-leon-when-you-see-yourself-album-nft-crypto-1135192/">to provide</a> enhanced media and special perks to their fans. And with sports memorabilia, <a href="https://www.nbcnews.com/news/us-news/foul-ball-did-nj-man-get-duped-buying-100k-bogus-n1019676">between 50% and 80%</a> of items are thought to be fake. Putting these items into NFTs with a clear transaction history back to the creator could overcome this counterfeiting problem. </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/E6iLV4q58QU?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
</figure>
<p>But beyond these fields, the potential of NFTs goes much further because they completely change the rules of ownership. Transactions in which ownership of something changes hands have usually depended on layers of middlemen to establish trust in the transaction, exchange contracts and ensure that money changes hands. </p>
<p>None of this will be necessary in future. Transactions recorded on blockchains are reliable because the information cannot be changed. Smart contracts can be used in place of lawyers and escrow accounts to automatically ensure that money and assets change hands and both parties honour their agreements. NFTs convert assets into tokens so that they can move around within this system. </p>
<p>This has the potential to completely transform markets like property and vehicles, for instance. NFTs could also be part of the solution in resolving issues with <a href="https://www.chicagotribune.com/news/ct-xpm-2006-08-27-0608270297-story.html">land ownership</a>. Only <a href="https://blogs.worldbank.org/voices/7-reasons-land-and-property-rights-be-top-global-agenda">30% of</a> the global population has legally registered rights to their land and property. Those without clearly defined rights find it much harder to access finance and credit. Also, if more of our lives are spent in <a href="https://decentraland.org/">virtual worlds</a> in future, the things that we buy there will probably be bought and sold as NFTs too. </p>
<p>There will be many other developments in this decentralised economy that have yet to be imagined. What we can say is that it will be a much more transparent and direct type of market than what we are used to. Those who think they are seeing a flash in the pan are unlikely to be prepared when it arrives.</p><img src="https://counter.theconversation.com/content/159563/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Where some see a bubble waiting to burst, others see a reinvention of the way we handle ownership of assets.James Bowden, Lecturer in Financial Technology, University of Strathclyde Edward Thomas Jones, Lecturer in Economics, Bangor UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1560832021-02-26T17:42:34Z2021-02-26T17:42:34ZGameStop: WallStreetBets trader army is back for a second share rally – here’s how to make sense of it<figure><img src="https://images.theconversation.com/files/386711/original/file-20210226-23-1nrmia9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The degenerates strike again. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/montreal-canada-february-3-2021-wallstreetbets-1909231093">denniszn</a></span></figcaption></figure><p><a href="https://uk.finance.yahoo.com/quote/GME/history?p=GME">GameStop</a> shares have gone soaring again. The Texan computer games retail chain at the heart of the stock market drama at the end of January surged from US$44 (£32) to a high of around US$200 on February 26 before sliding back to US$120 at the time of writing. Institutional investors who had “short positions” against the stock, meaning that they were betting it was going to go down, were <a href="https://markets.businessinsider.com/news/stocks/gamestop-short-sellers-billions-losses-reddit-traders-wallstreetbets-rally-gme-2021-2-1030125873">said to have</a> racked up nearly US$2 billion losses from the rises.</p>
<p>Other stocks involved in the first wave of retail trading mania such as cinema group <a href="https://www.tradingview.com/symbols/NYSE-AMC/">AMC Entertainment</a> have followed a similar trajectory, doubling at one point and still almost 50% up on the calm of a few days earlier. So why are investors buying these stocks again? </p>
<p>The army of millions of investors from Reddit’s <a href="https://www.reddit.com/r/wallstreetbets/">WallStreetBets</a> community pushed GameStop shares from US$20 to US$480 during the January “<a href="https://theconversation.com/gamestop-hedge-fund-attacks-have-opened-up-powerful-new-front-against-wall-street-154284">short squeeze</a>”, in which they drove hedge funds like Melvin Capital into heavy losses, after forcing them to liquidate massive bets against the stock. </p>
<p>As the GameStop price fell back in early February, many of these small investors were counting their losses. There have since been countless debates over the mania, including a <a href="https://www.theguardian.com/business/live/2021/feb/18/gamestop-hearing-live-news-updates-robinhood-ceo-trading-app-testimony-congress">congressional hearing</a> in the US on February 18. </p>
<h2>The recriminations</h2>
<p>Online trading apps at the centre of the buying frenzy, such as Robinhood, have been variously accused of making it too easy for amateurs to take wild risks, enabling market manipulation, risking the <a href="https://www.fxstreet.com/news/can-gamestop-gme-stock-destabilize-the-entire-market-202102251239">financial stability</a> of the wider system, and siding with hedge fund backers Citadel by heavily restricting buying in the stocks in question after prices rocketed. </p>
<p>Over the latter issue, multiple users filed lawsuits against Robinhood and Citadel, though <a href="https://www.cnbc.com/2021/02/17/robinhood-faces-lawsuits-after-gamestop-trading-halt.html">according to</a> a clause in Robinhood’s customer agreement, all disputes are to be settled in arbitration and not in the civil court system. Robinhood CEO Vlad Tenev has denied the allegations, <a href="https://www.theguardian.com/business/2021/feb/18/gamestop-hearing-latest-robinhood-founder-testimony-vlad-tenev-stocks-app">offering his own</a> explanation at the congressional hearing. </p>
<p>Meanwhile, the adopted leader of the WallStreetBets movement, Keith Gill (known as RoaringKitty and DeepFuckingValue on different platforms), has become the subject of a <a href="https://www.bbc.co.uk/news/business-56106824">lawsuit himself</a>. He stands accused in misrepresenting himself as an amateur and manipulating other users to follow his risky speculative strategies. As he memorably told congress during the February 18 hearing, “I like the stock”. The lawsuit has been ridiculed by <a href="https://www.reddit.com/r/wallstreetbetsHIGH/comments/louzb7/roaring_kitty_keith_gill_defends_himself_i_am_not/">Gill</a> and on social media, triggering “<a href="https://www.reddit.com/r/law/comments/lgbc1b/im_here_live_im_not_a_cat/">I am not a cat</a>” jokes and memes alike. </p>
<h2>Understanding the phenomenon</h2>
<p>While all these questions will continue, the new GME share price rally shows that it was not a one-off situation. It’s <a href="https://www.reuters.com/article/uk-retail-trading-gamestop-idUKKBN2AQ1FQ">not completely clear</a> why the shares have been targeted again. It <a href="https://www.ft.com/content/50eaa1b5-d244-4b3e-b460-736828c049cd">could be linked to</a> the fact that the congressional hearing has passed. It could be linked to the resignation of GameStop chief finance officer Jim Bell, signalling a change of direction in the company. Or it could be to do with the fact that short positions on the firm’s shares <a href="https://www.reddit.com/r/GME/comments/lspfus/finra_data_now_shows_over_58_million_gme_stocks/">had risen again</a>, possibly prompting amateur traders to <a href="https://www.ft.com/content/50eaa1b5-d244-4b3e-b460-736828c049cd">buy bullish options</a> in the stock which will pay out handsomely if the price keeps rising. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/386725/original/file-20210226-15-54rtg2.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Meme featuring the words 'I just like the stock' over screenshot from The Matrix" src="https://images.theconversation.com/files/386725/original/file-20210226-15-54rtg2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/386725/original/file-20210226-15-54rtg2.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=411&fit=crop&dpr=1 600w, https://images.theconversation.com/files/386725/original/file-20210226-15-54rtg2.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=411&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/386725/original/file-20210226-15-54rtg2.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=411&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/386725/original/file-20210226-15-54rtg2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=517&fit=crop&dpr=1 754w, https://images.theconversation.com/files/386725/original/file-20210226-15-54rtg2.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=517&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/386725/original/file-20210226-15-54rtg2.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=517&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Meme circulating on Reddit’s WallStreetBets during the second GME surge.</span>
<span class="attribution"><span class="source">Reddit</span></span>
</figcaption>
</figure>
<p>But at the same time, I would argue that none of these reasons properly explain what is happening here. After years of researching financial markets and specifically the new highly speculative cryptocurrency market, I can identify three main reasons behind the phenomenon. </p>
<p>First, it is about the expansion of fintech and the ongoing decentralisation of the financial market. New technologies such as easy trading apps provide access to financial markets to a large number of amateurs. They enable financial liberalisation and autonomy from the major banks and the other institutions that control the market, just like cryptocurrencies do, and this has mass appeal. Finance scholars have named this effect “<a href="https://www.sciencedirect.com/science/article/pii/S0929119920302030">crypto-exuberance</a>”. </p>
<p>Second, it’s an extension of the meme culture of millennials and generation Z “zoomers”, in which emotions are expressed with images, sounds, videos, emojis and abstract humour. Social media posts might contain sequences of unidentifiable nonsense, offensive terms and never-ending slang. </p>
<p>This all makes it harder to assess the sentiments behind them. For example, behavioural finance researchers would normally use algorithms to extract investor sentiments from Twitter posts, Google search trends and <a href="https://www.tandfonline.com/doi/full/10.1080/1351847X.2020.1737168?af=R">media headlines</a>. But how would you use the academic software to analyse the content on r/WallStreetBets? This a huge challenge. </p>
<p>The third and perhaps least obvious driving force is the pandemic. A young generation of traders already blamed the older ones for the global financial crisis. The pandemic <a href="https://www.cebm.net/2020/10/has-covid-19-highlighted-social-injustice-built-into-our-cities/">has amplified</a> these feelings of social injustice and hatred against the money of the baby boomers, as millennials who grew up or studied during the past recession are now facing another one as young professionals. </p>
<p>The government restrictions and the social isolation that they have caused have also arguably spiked rebellious sentiments. At the same time, this situation creates an ideal environment for all sorts of market manipulations. </p>
<p>So if the second GameStop rally has surprised you, you don’t really need to find a rational explanation for it. GameStop’s stock rally is driven by a combination of cultural and environmental factors. The fact that these all appear to be more important to these amateur traders than making money is fascinating and should be studied. Besides GameStop, AMC and also the decent <a href="https://www.telegraph.co.uk/technology/2021/02/24/bitcoin-bounces-jack-dorsey-invests-170m-live-updates/">Dogecoin explosion</a>, we will continue to observe more cases like this in the future.</p><img src="https://counter.theconversation.com/content/156083/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Larisa Yarovaya does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Shares in the gaming chain and other stocks like AMC and BlackBerry are soaring once again.Larisa Yarovaya, Deputy Head of the Centre for Digital Finance, Lecturer in Finance, University of SouthamptonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1542482021-02-22T13:24:54Z2021-02-22T13:24:54ZIf Big Tech has the will, here are ways research shows self-regulation can work<figure><img src="https://images.theconversation.com/files/385146/original/file-20210218-17-1drjewk.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C4256%2C2822&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">To better police misinformation, social media companies can curb their appetites for constant engagement.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/laptop-with-the-facebook-like-or-thumbs-up-sign-emoji-is-news-photo/1072225728?adppopup=true">Jaap Arriens/NurPhoto via Getty Images</a></span></figcaption></figure><p>Governments and observers across the world have repeatedly <a href="https://www.nytimes.com/2020/10/06/technology/congress-big-tech-monopoly-power.html">raised concerns about the monopoly power of Big Tech companies</a> and the role the companies play in disseminating misinformation. In response, Big Tech companies have tried to preempt regulations by <a href="https://www.economist.com/united-states/2021/02/13/facebook-tries-to-pre-empt-regulation-by-squeezing-anti-vaxxers">regulating themselves</a>. </p>
<p>With Facebook’s announcement that its <a href="https://time.com/5934393/facebook-oversight-board-big-tech-future/">Oversight Board will make a decision</a> about whether former President Donald Trump can regain access to his account after the company suspended it, this and other high-profile moves by technology companies to address misinformation have reignited the debate about what responsible self-regulation by technology companies should look like. </p>
<p>Research shows three key ways social media self-regulation can work: deprioritize engagement, label misinformation and crowdsource accuracy verification.</p>
<h2>Deprioritize engagement</h2>
<p>Social media platforms are built for <a href="https://dx.doi.org/10.2139/ssrn.2554689">constant interaction</a>, and <a href="https://www.fastcompany.com/90458174/hate-outrage-and-cancel-culture-are-snowballing-thanks-to-this">the companies design the algorithms that choose which posts people see</a> to keep their users engaged. Studies show <a href="https://dx.doi.org/10.1126/science.aap9559">falsehoods spread faster than truth on social media</a>, often because people find <a href="https://doi.org/10.1073/pnas.1320040111">news that triggers emotions to be more engaging</a>, which makes it more likely they will read, react to and share such news. This effect gets amplified through algorithmic recommendations. <a href="https://dx.doi.org/10.2139/ssrn.3061149">My own work</a> shows that people engage with YouTube videos about diabetes more often when the videos are less informative.</p>
<p>Most Big Tech platforms <a href="https://niemanreports.org/articles/how-news-flows-on-social-media/">also operate without the gatekeepers or filters</a> that govern traditional sources of news and information. Their vast troves of <a href="https://theconversation.com/facebook-begins-to-shift-from-being-a-free-and-open-platform-into-a-responsible-public-utility-101577">fine-grained and detailed demographic data</a> give them the ability to <a href="https://doi.org/10.1177%2F2053951718811844">“microtarget” small numbers of users</a>. This, combined with algorithmic amplification of content designed to boost engagement, can have a host of negative consequences for society, including <a href="https://www.vox.com/videos/2020/9/30/21495386/digital-voter-suppression-russian-social-media">digital voter suppression</a>, <a href="https://www.fastcompany.com/90557236/report-trump-facebook-campaign-tried-to-deter-black-voters-with-ads-in-2016">the targeting of minorities for disinformation</a> and <a href="https://www.shrm.org/resourcesandtools/hr-topics/behavioral-competencies/global-and-cultural-effectiveness/pages/is-it-discriminatory-to-only-show-job-ads-to-young-social-media-users.aspx">discriminatory ad targeting</a>. </p>
<p>Deprioritizing engagement in content recommendations should lessen the “<a href="https://www.scientificamerican.com/article/youtubes-recommendation-algorithm-has-a-dark-side/">rabbit hole” effect of social media</a>, where people look at post after post, video after video. The <a href="https://doi.org/10.2105/AJPH.2020.305922">algorithmic design of Big Tech platforms</a> prioritizes new and microtargeted content, which fosters an almost unchecked proliferation of misinformation. <a href="https://www.reuters.com/article/us-apple-facebook/apples-tim-cook-criticizes-social-media-practices-intensifying-facebook-conflict-idUSKBN29X2NB">Apple CEO Tim Cook recently summed up the problem</a>: “At a moment of rampant disinformation and conspiracy theories juiced by algorithms, we can no longer turn a blind eye to a theory of technology that says all engagement is good engagement – the longer the better – and all with the goal of collecting as much data as possible.”</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/nPMk12aHXfU?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Apple CEO Tim Cook criticized social media companies for prioritizing engagement over battling misinformation.</span></figcaption>
</figure>
<h2>Label misinformation</h2>
<p>The technology companies could adopt a content-labeling system to identify whether a news item is verified or not. During the election, Twitter announced a <a href="https://www.startribune.com/did-social-media-actually-counter-election-misinformation/572972662/">civic integrity policy</a> under which tweets labeled as disputed or misleading would not be <a href="https://www.npr.org/2020/10/09/922028482/twitter-expands-warning-labels-to-slow-spread-of-election-misinformation">recommended by their algorithms</a>. Research shows that labeling works. Studies suggest that <a href="https://misinforeview.hks.harvard.edu/article/state-media-warning-labels-can-counteract-the-effects-of-foreign-misinformation/">applying labels to posts from state-controlled media outlets</a>, such as from the Russian media channel RT, could mitigate the effects of misinformation. </p>
<p>In an experiment, researchers hired anonymous temporary workers <a href="https://doi.org/10.1073/pnas.1806781116">to label trustworthy posts</a>. The posts were subsequently displayed on Facebook with labels annotated by the crowdsource workers. In that experiment, crowd workers from across the political spectrum were able to distinguish between mainstream sources and hyperpartisan or fake news sources, suggesting that crowds often do a good job of telling the difference between real and fake news.</p>
<p>Experiments also <a href="https://dx.doi.org/10.1037%2Fxge0000465">show that individuals with some exposure to news sources</a> can generally distinguish between real and fake news. Other experiments <a href="https://doi.org/10.1177%2F0956797620939054">found that providing a reminder about the accuracy of a post</a> increased the likelihood that participants shared accurate posts more than inaccurate posts.</p>
<p>In my own work, I have studied how combinations of human annotators, or content moderators, and artificial intelligence algorithms – what is referred to as human-in-the-loop intelligence – <a href="https://dx.doi.org/10.2139/ssrn.3711751">can be used to classify health care-related videos on YouTube</a>. While it is not feasible to have medical professionals watch every single YouTube video on diabetes, it is possible to have a human-in-the-loop method of classification. For example, my colleagues and I recruited subject-matter experts to give feedback to AI algorithms, which results in better assessments of the content of posts and videos. </p>
<p>Tech companies have already employed such approaches. Facebook uses a <a href="https://www.analyticsinsight.net/facebook-uses-ai-fight-coronavirus-misinformation-fake-news/">combination of fact-checkers and similarity-detection algorithms</a> to screen COVID-19-related misinformation. The algorithms <a href="https://ai.facebook.com/blog/using-ai-to-detect-covid-19-misinformation-and-exploitative-content/">detect duplications and close copies</a> of misleading posts. </p>
<h2>Community-based enforcement</h2>
<p>Twitter recently announced that it is <a href="https://www.nbcnews.com/tech/social-media/twitter-launches-birdwatch-forum-combat-misinformation-n1255552">launching a community forum, Birdwatch</a>, to combat misinformation. While Twitter hasn’t provided details about how this will be implemented, a crowd-based verification mechanism adding <a href="https://doi.org/10.1145/3159652.3159734">up votes or down votes</a> to trending posts and using <a href="https://doi.org/10.1145/3313831.3376232">newsfeed algorithms to down-rank content</a> from untrustworthy sources could help reduce misinformation. </p>
<p>The basic idea is similar to <a href="https://en.wikipedia.org/wiki/Wikipedia:Contributing_to_Wikipedia">Wikipedia’s content contribution system</a>, where volunteers classify whether trending posts are real or fake. The challenge is preventing people from up-voting interesting and compelling but unverified content, particularly when there are <a href="https://doi.org/10.1109/TrustCom/BigDataSE.2018.00037">deliberate efforts to manipulate voting</a>. People can game the systems <a href="https://www.vox.com/the-goods/22249458/gamestop-stock-wallstreetbets-reddit-citron">through coordinated action</a>, as in the recent <a href="https://marker.medium.com/gamestop-proves-were-in-a-meme-stock-bubble-b3f39163a77f">GameStop stock-pumping episode</a>. </p>
<p>Another problem is how to motivate people to voluntarily participate in a collaborative effort such as crowdsourced fake news detection. Such efforts, however, rely on volunteers <a href="https://www.kdd.org/exploration_files/19-1-Article2.pdf">annotating the accuracy of news articles</a>, akin to Wikipedia, and also require the participation of <a href="https://www.microsoft.com/en-us/research/publication/detecting-fake-news-social-networks-via-crowdsourcing/">third-party fact-checking organizations</a> that can be used to detect if a piece of news is misleading. </p>
<p>However, a Wikipedia-style model needs <a href="https://doi.org/10.1145/2482991.2482999">robust mechanisms</a> of <a href="https://ojs.aaai.org/index.php/ICWSM/article/view/14013">community governance</a> to ensure that individual volunteers follow consistent guidelines when they authenticate and fact-check posts. Wikipedia recently updated its community standards specifically <a href="https://www.france24.com/en/live-news/20210202-wikipedia-unveils-code-of-conduct-to-stem-misinformation">to stem the spread of misinformation</a>. Whether the big-tech companies will voluntarily allow their content moderation policies to be reviewed so transparently is another matter. </p>
<p>[<em>Get our best science, health and technology stories.</em> <a href="https://theconversation.com/us/newsletters/science-editors-picks-71/?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=science-best">Sign up for The Conversation’s science newsletter</a>.]</p>
<h2>Big Tech’s responsibilities</h2>
<p>Ultimately, social media companies could use a combination of deprioritizing engagement, partnering with news organizations, and AI and crowdsourced misinformation detection. These approaches are unlikely to work in isolation and will need to be designed to work together. </p>
<p>Coordinated actions facilitated by social media can disrupt society, from <a href="https://www.politico.com/news/magazine/2021/02/04/how-occupy-wall-street-explains-the-gamestop-fiasco-465878">financial markets</a> to <a href="https://www.buzzfeednews.com/article/elaminabdelmahmoud/trump-mob-social-media-insurrection">politics</a>. The technology platforms play an extraordinarily large role in shaping public opinion, which means they bear a <a href="https://theconversation.com/facebook-begins-to-shift-from-being-a-free-and-open-platform-into-a-responsible-public-utility-101577">responsibility to the public</a> to govern themselves effectively. </p>
<p>Calls for government regulation of Big Tech are growing all over the world, including in the U.S., where a recent Gallup poll showed <a href="https://news.gallup.com/poll/329666/views-big-tech-worsen-public-wants-regulation.aspx">worsening attitudes toward technology companies</a> and greater support for governmental regulation. Germany’s <a href="https://www.wsj.com/articles/facebook-google-have-a-tough-new-job-in-germany-content-cop-1515605207?mod=article_inline">new laws on content moderation</a> push greater responsibility on tech companies for the content shared on their platforms. A slew of <a href="https://www.wsj.com/articles/tech-giants-face-new-rules-in-europe-backed-by-huge-fines-11608046500">regulations in Europe</a> aimed at reducing the liability protections enjoyed by these platforms and <a href="https://www.wsj.com/articles/how-congress-might-upend-section-230-the-internet-law-big-tech-is-built-on-11613172368?mod=tech_listb_pos1">proposed regulations in the U.S. aimed at restructuring internet laws</a> will bring greater scrutiny to tech companies’ content moderation policies.</p>
<p>Some form of government regulation is likely in the U.S. Big Tech still has an opportunity to engage in responsible self-regulation – before the companies are compelled to act by lawmakers.</p><img src="https://counter.theconversation.com/content/154248/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anjana Susarla does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Misinformation isn’t an inevitable product of social media. Proven techniques can help tech companies clean up their acts.Anjana Susarla, Omura-Saxena Professor of Responsible AI, Michigan State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1550842021-02-11T19:09:07Z2021-02-11T19:09:07ZInvestors swoon over Bumble’s IPO – but what exactly is an initial public offering?<figure><img src="https://images.theconversation.com/files/383870/original/file-20210211-23-1gdqo2i.jpg?ixlib=rb-1.1.0&rect=332%2C7%2C4826%2C3426&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Bumble's IPO raised $2.15 billion for the women-go-first dating app.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/an-afp-journalist-holds-his-phone-showing-the-dating-news-photo/1203460431">Eric Baradat/AFP via Getty Images</a></span></figcaption></figure><p>Bumble <a href="https://www.investors.com/news/technology/bumble-ipo-initial-public-offering-trades-thursday-bmbl-mtch/">raised US$2.15 billion in an initial public offering</a>, or IPO, late on Feb. 10, just in time for Valentine’s Day. Investors swooned over the women-go-first dating app, buying more shares and at a higher price than initially expected, valuing the company at $8.3 billion. </p>
<p>But what exactly is an IPO? </p>
<p>As a <a href="https://wvu.academia.edu/JFluharty">finance professor</a>, I believe understanding IPOs are an important part of knowing how markets work. More interesting to me, however, is how a new type of IPO is growing in popularity – including among the Redditors who are upending financial markets – and allowing more investors than ever to buy into the “hype” when a company goes public.</p>
<h2>Why companies go public</h2>
<p>Companies use IPOs – known as “going public” – to access the deep pockets of the U.S. stock market. At the end of 2020, <a href="https://siblisresearch.com/data/us-stock-market-value/">the IPO market was valued at over $50 trillion</a>.</p>
<p>To <a href="https://www.investopedia.com/terms/i/ipo.asp">understand what an IPO is</a>, think about starting a private business. You might deposit $50,000 into a bank account, purchase equipment and start operations. However, eventually, you will run out of money if you need to expand – especially if you are growing quickly.</p>
<p>To make life a little easier, you may attempt to obtain money from your friends or family or secure a loan from a bank. Similarly, public companies can access the stock market to raise money from investors in exchange for the promise of future profits and returns.</p>
<p>But in order to do that, first the company must go public.</p>
<p>When a business decides to go through with an IPO, it first goes to an investment banker – the same way you might go to a real estate broker when you decide to sell your house. The banker does all the same things that a broker might do, such as appraising the business by determining its value and risk and trying to match the company that is going public with well-heeled buyers who might be interested in buying a share of it. </p>
<p>In some cases, the banker might act more like a used car dealer, in which case the investment bank buys the company’s shares for a set price and then sells them to other investors later on at – it hopes – a profit. </p>
<p>In any case, the company going public doesn’t sell its new shares to “regular investors.” Instead the banks handling the deal turn to their favored wealthy clients, who initially buy shares and then sell them on to the public when the stock begins trading – usually at much higher prices than they paid. <a href="https://www.sec.gov/rules/final/2020/33-10824.pdf">Legal restrictions</a> mean the average individual cannot buy shares directly from an investment bank. So you typically need to be an accredited investor to be qualified, and trading app Robinhood’s army of day traders likely wouldn’t be eligible. </p>
<p>Success for an IPO typically means two things: The company gets as much as or more money than it aimed for, and the price “pops” on the first day of trading. </p>
<p>In Bumble’s case, <a href="https://www.sec.gov/Archives/edgar/data/1830043/000119312521025246/d20761ds1a.htm">it initially offered 34.5 million shares</a> at a price of $28 to $30, but <a href="https://seekingalpha.com/news/3660867-bumble-sets-ipo-at-39-dollars-a-share">overwhelming demand meant</a> it was able to sell 50 million at $43. That allowed it to raise well more than double the capital it had earlier planned on. </p>
<p>As far as whether early investors will get a first-day boost, <a href="https://finance.yahoo.com/quote/BMBL/">BMBL surged to $70.31</a> on Feb. 11 in its first day of trading on the NASDAQ stock exchange, creating a hefty profit for investors who bought into the IPO and sold their shares.</p>
<h2>Rise of the SPAC</h2>
<p>However, there’s a new IPO method in town that is becoming an increasingly common way for companies to go public: the SPAC IPO. </p>
<p>SPAC stands for special purpose acquisition company, and they have suddenly become the next big thing among <a href="https://www.reddit.com/r/wallstreetbets/comments/gy62lm/basic_introduction_to_spacs/">Redditors on WallStreetBets</a> who <a href="https://www.cnn.com/2021/01/27/investing/gamestop-reddit-stock/index.html">fueled the skyrocketing prices</a> of GameStop, AMC, silver and other securities in recent weeks. The zero-comission trading app Robinhood, which had been the Redditors’ favored place to buy stocks, <a href="https://www.pymnts.com/news/ipo/2021/robinhood-marches-on-with-ipo-despite-gamestop-trading-debacle/">is even considering doing a SPAC</a> rather than a normal IPO as it seeks to go public. </p>
<p>The difference is that a SPAC is like an IPO in reverse. An investor-led fund does an actual IPO – raising money from other elite Wall Street types – but with a shell of a company that has no operations. Known as a “blank check” business, its entire purpose is to eventually purchase an unspecified private company, thus making it public as well, and <a href="https://www.sec.gov/corpfin/disclosure-special-purpose-acquisition-companies">typically has two years to do it</a>.</p>
<p>In 2020, there were about the same number of <a href="https://insight.factset.com/u.s.-ipo-market-spacs-drive-2020-ipos-to-a-new-record">traditional IPOs as SPACs</a> for the first time <a href="https://www.econstor.eu/bitstream/10419/177392/1/2017-02-12%20SPAC%20IPOs%20Chapter%20SSRN.pdf">since the first SPAC was created in 2003</a>.</p>
<p>The upshot is that essentially anyone can invest in a SPAC and acquire a piece of the once-private company. Of course, this is also a very speculative investment, and it’s easy to lose everything. But that can be true of any IPO, which <a href="https://www.barrons.com/articles/SB52133021052493823286804580163941038934092">have historically underperformed the market</a>. </p>
<p>In other words, as always, <a href="https://corpgov.law.harvard.edu/2020/11/19/a-sober-look-at-spacs/">buyer beware</a>.</p>
<p>[<em>Insight, in your inbox each day.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=insight">You can get it with The Conversation’s email newsletter</a>.]</p><img src="https://counter.theconversation.com/content/155084/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jonathan T. Fluharty-Jaidee does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A finance scholar explains what an IPO is, how it works and a new way companies are going public that’s winning the hearts of WallStreetBets Redditors.Jonathan T. Fluharty-Jaidee, Assistant Department Chair and Professor of Finance, West Virginia UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1547162021-02-08T14:02:51Z2021-02-08T14:02:51ZDrake and Jake, Mountain Dew’s millions and the Marvel Universe – which ads won the Super Bowl, and which fell flat<figure><img src="https://images.theconversation.com/files/382968/original/file-20210208-13-1s54wdo.png?ixlib=rb-1.1.0&rect=146%2C21%2C1895%2C1294&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">State Farm's 'Drake' ad was one of the Twitter winners of the Super Bowl.</span> <span class="attribution"><a class="source" href="https://youtu.be/lvpq2OjmJvg">State Farm</a></span></figcaption></figure><p>Live sporting events are among the few remaining places where advertisers can ensure that no one fast forwards through their commercials which is why companies were willing to pay <a href="https://www.fastcompany.com/90601590/how-much-does-a-super-bowl-ad-cost-heres-how-2021-compares">US$5.5 million</a> for just 30 seconds of air time on Super Bowl Sunday. </p>
<p>So who “won” the Super Bowl ad war? </p>
<p>For the last two years, <a href="https://utccismcc.utk.edu/people/graduate-assistant">I have</a> been using the <a href="https://utccismcc.utk.edu/">Adam Brown Social Media Command Center</a> at the University of Tennessee to understand how social media like Twitter and Facebook react to major events such as presidential debates, breaking news like the <a href="https://theconversation.com/us/search?q=gamestop">GameStop craze</a> and sporting events like the Super Bowl.</p>
<p>Engagement on Twitter <a href="http://www.doi.org/10.2501/JAR-54-4-454-468">is one measure companies use</a> to determine an advertisement’s success and whether it was worth all those millions – not to mention the cost of making Super Bowl ads, which often include celebrities. </p>
<p>Here’s what I noticed from monitoring social media during Super Bowl LV.</p>
<h2>The performers</h2>
<p>I didn’t monitor the game itself – in which Tom Brady led the <a href="https://www.cbssports.com/nfl/news/2021-super-bowl-score-tom-brady-wins-seventh-ring-as-buccaneers-dominate-chiefs-and-patrick-mahomes/live/">Tampa Bay Buccaneers to a 31-9 victory</a> over the Kansas City Chiefs. But I did notice the performers, <a href="https://www.nytimes.com/2021/02/07/sports/football/amanda-gorman-poem-chorus-of-the-captains.html">including the first poet</a> to ever present at a Super Bowl, received a lot of buzz. </p>
<p>The <a href="https://theconversation.com/what-the-weeknds-changing-face-says-about-our-sick-celebrity-culture-154164">Weeknd</a>’s halftime performance – and <a href="https://twitter.com/MeggyNikirk/status/1358593762365210624?s=20">his closeup</a> – was the talk of Twitter, <a href="https://www.forbes.com/sites/maddieberg/2020/02/02/super-bowl-halftime-show-2019-twitter-reacts-to-jennifer-lopez/?sh=2858ed79cc2e">as Super Bowl performances usually are</a>. With his prime time slot and <a href="https://twitter.com/goIdenspacegirl/status/1358589788920696835?s=20">greatest hits montage</a>, he was the biggest hit on social media, with over 821,000 mentions during the game, most of which were quite positive. </p>
<p>Poet Amanda Gorman, <a href="https://www.cnn.com/2021/02/04/us/amanda-gorman-super-bowl-poetry-writegirl-cnnheroes/index.html">who gained national recognition</a> at President Joe Biden’s inauguration, received almost 60,000 mentions that were overwhelmingly positive after <a href="https://www.cnn.com/2021/02/07/us/amanda-gorman-super-bowl-poem-trnd/index.html">she read a poem</a> during the pre-game show. </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/-ejbSCjg2qo?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Amanda Gorman recites ‘Chorus of the Captains.’</span></figcaption>
</figure>
<h2>Drake, Disney and Dew</h2>
<p>Of the dozens of companies that bought ad time during the big game, three won the Twitterverse with the most positively talked about advertisements of the evening. </p>
<p>I reached that conclusion by analyzing the volume of tweets that mentioned the company or used a hashtag introduced in the commercial, as well as by examining the sentiment score to see whether the conversation around the ads was positive or negative. </p>
<p>One of the big winners was <a href="https://youtu.be/lvpq2OjmJvg">State Farm’s ads starring Drake</a>, in which the rapper appears as a stand-in for “Jake,” who has appeared frequently in the insurer’s advertisements. Over 28,000 tweets mentioned State Farm within 40 minutes of the commercial’s first airing, for a total of 44,000 during the game. “Drake” was a keyword in most of them. Sentiment was very positive for most of the night as people found “Drake from State Farm” funny, until some users brought up the “Drake curse” that is <a href="https://www.bbc.com/news/newsbeat-47947155">supposedly bad luck for sports teams</a>.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/lvpq2OjmJvg?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">‘Drake from State Farm.’</span></figcaption>
</figure>
<p><a href="https://youtu.be/tI1gj730go0">Disney’s trailer</a> for its upcoming series “The Falcon and The Winter Soldier” performed even better, spurring over 100,000 tweets that specifically mentioned the show. Sentiment was also overwhelmingly positive for the show which stars two characters from the Marvel universe, with a score of over 90% throughout the evening. </p>
<p>Mountain Dew’s ad featuring pro wrestler John Cena driving through a “<a href="https://www.adweek.com/brand-marketing/mountain-dew-likely-super-bowl-2021-most-watched-ad/">surreal watermelon-themed amusement park</a>” won the evening on social media. It received over 300,000 mentions, likely driven by the $1 million offered to the first person who tweeted out the correct number of “major melon” bottles that appeared in the ad. </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/sjMalUSxBvs?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Mountain Dew’s million-dollar giveaway.</span></figcaption>
</figure>
<h2>A few duds</h2>
<p>Super Bowl mainstay Budweiser had a pretty bad night. At first it said <a href="https://adage.com/article/special-report-super-bowl/super-bowl-lvs-big-commercial-void-makes-room-newbies/2308421">it would not buy advertising this year</a> and instead donate the money to coronavirus vaccination awareness efforts. But apparently it changed its mind and ran several ads for <a href="https://youtu.be/X9jkvq4-tCU">Bud Light</a> and <a href="https://youtu.be/g6CVKs77X74">Bud Light Seltzer</a>. Mentions of the two beers were under 10,000 and sentiment turned negative after the ads began running. </p>
<p>Shift4Shop, an e-commerce platform, <a href="https://www.businesswire.com/news/home/20210203005282/en/Super-Bowl-Ad-for-Inspiration4-Invites-Viewers-to-Join-World%E2%80%99s-First-All-Civilian-Mission-to-Space">advertised its partnership</a> with the Inspiration4 civilian mission to space. The ad did not appear to leave much of an impact on Twitter users, however, with fewer than 2,000 tweets during the game – not much of an effect for the price tag. It reminded me of <a href="https://www.youtube.com/watch?v=N76DzOYxNyo">Quibi’s Super Bowl ad last year</a> which was meant to be the TV streaming app’s debut to the world. It <a href="https://www.radio.com/y98/blogs/the-y98-morning-show/ad-meters-best-rated-and-worst-rated-super-bowl-commercials">was not well-received</a>, and the company <a href="https://deadline.com/2020/10/quibi-to-shut-down-ending-2b-streaming-experiment-1234601356/">called it quits</a> in December. </p>
<p>Another big loser were advertisements that were “heavy” – ad jargon for commercials that are overly emotive, such as those referencing weighty events like the pandemic or the Capitol riots. Most Super Bowl advertisers avoided these themes – opting instead for <a href="https://www.nytimes.com/2021/02/07/business/media/super-bowl-commercials.html?action=click&module=Top%20Stories&pgtype=Homepage">escapism and nostalgia</a>. And the ones that did go heavy didn’t do well, such as <a href="https://youtu.be/yfLz54hzpPs">Bass Pro Shops and Cabela’s</a> ad, during which the narrator intoned that “in these trying times we need nature more than ever.”</p>
<p><a href="https://www.youtube.com/watch?v=D2XYH-IEvhI">Jeep’s ad starring Bruce Springsteen</a> garnered a lot of attention – 20,000 tweets within minutes of its airing after half time – but most of it negative. Over two minutes, the Boss implores Americans to “meet in the middle” in a call for unity that <a href="https://twitter.com/ItsKennyatta/status/1358610451395973121?s=20">some Twitter users described</a> as “tone deaf.” </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/D2XYH-IEvhI?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Too political?</span></figcaption>
</figure>
<h2>Honorable mention</h2>
<p>While it didn’t break the internet, vegan food company <a href="https://youtu.be/r2-f-qBcQFs">Oatly’s love-it-or-hate-it ad</a> got a fair amount of attention given how minimilistic it was. </p>
<p>It featured the company’s CEO playing piano in a field and singing about Oatly’s products. People seemed evenly split on whether the ad was good or <a href="https://twitter.com/CouRageJD/status/1358576481648078848?s=20">absolutely horrible</a> – but it did generate over 16,000 tweets. The negative reaction may have been the company’s plan all along as it immediately began selling T-shirts saying, “<a href="https://www.businessinsider.com/oatly-released-t-shirt-widely-hated-super-bowl-commercial-2021-2">I totally hated that Oatly commercial</a>.” </p>
<p>The shirts sold out in five minutes.</p>
<p>[<em>You’re too busy to read everything. We get it. That’s why we’ve got a weekly newsletter.</em> <a href="https://theconversation.com/us/newsletters/weekly-highlights-61?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=weeklybusy">Sign up for good Sunday reading.</a> ]</p><img src="https://counter.theconversation.com/content/154716/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alexander Carter does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Advertisers forked over $5.5 million for a mere 30 seconds of air time during the Super Bowl. Here’s Twitter’s verdict on which brands got social media bang for their bucks.Alexander Carter, Phd Student in Advertising, University of TennesseeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1544272021-02-08T11:21:50Z2021-02-08T11:21:50ZBanning disruptive online groups is a game of Whac-a-Mole that web giants just won’t win<figure><img src="https://images.theconversation.com/files/382587/original/file-20210204-14-1k56qsd.jpg?ixlib=rb-1.1.0&rect=0%2C8%2C5991%2C3979&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/angry-mob-various-diverse-people-on-1508248688">Zenza Flarini/Shutterstock</a></span></figcaption></figure><p>From Washington DC to Wall Street, 2021 has already seen online groups causing major organised offline disruption. Some of it has been in violation of national laws, some in violation of internet platforms’ terms of service. When these groups are seen to cause societal harm, the solution has been knee-jerk: to ban or “deplatform” those groups immediately, leaving them digitally “homeless”.</p>
<p>But the online world is a Pandora’s box of sites, apps, forums and message boards. Groups banned from Facebook migrated seamlessly to Parler, and from Parler, via encrypted messaging apps, to a host of other platforms. My research has shown how easily users migrate between platforms on the “dark web”. Deplatforming won’t work on the regular internet for the same reason: it’s become too easy for groups to migrate elsewhere.</p>
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Read more:
<a href="https://theconversation.com/does-deplatforming-work-to-curb-hate-speech-and-calls-for-violence-3-experts-in-online-communications-weigh-in-153177">Does 'deplatforming' work to curb hate speech and calls for violence? 3 experts in online communications weigh in</a>
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<p>This year, we’ve come to see social platforms not as passive communication tools, but rather as active players in public discourse. Twitter’s <a href="https://blog.twitter.com/en_us/topics/company/2020/suspension.html">announcement</a> that it had permanently suspended Donald Trump in the wake of the Capitol riots is one such example: a watershed moment for deplatforming as a means of limiting harmful speech.</p>
<p>Elsewhere, the Robinhood investment platform suspended the trading of GameStop stocks after the Reddit group r/WallStreetBets (which had 2.2 million members at the time) <a href="https://theconversation.com/gamestop-im-one-of-the-wallstreetbets-degenerates-heres-why-retail-trading-craze-is-just-getting-started-154584">coordinated a mass purchase</a> of the shares. While the original Reddit group remained open, many r/WallStreetBets users had also been communicating via the social network Discord. In response, <a href="https://www.theverge.com/2021/1/27/22253251/discord-bans-the-r-wallstreetbets-server">Discord banned their channel</a>, citing “hate speech”.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/382747/original/file-20210205-23-na5j4c.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A tweet from a Reddit users asking people to migrate to a different platform" src="https://images.theconversation.com/files/382747/original/file-20210205-23-na5j4c.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/382747/original/file-20210205-23-na5j4c.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=246&fit=crop&dpr=1 600w, https://images.theconversation.com/files/382747/original/file-20210205-23-na5j4c.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=246&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/382747/original/file-20210205-23-na5j4c.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=246&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/382747/original/file-20210205-23-na5j4c.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=309&fit=crop&dpr=1 754w, https://images.theconversation.com/files/382747/original/file-20210205-23-na5j4c.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=309&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/382747/original/file-20210205-23-na5j4c.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=309&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Platform promiscuity: a Twitter account connected to a Reddit trading group invites followers to connect on Instagram.</span>
</figcaption>
</figure>
<h2>Net Migration</h2>
<p>Deplatforming is the mechanism currently used by social networks and technology companies to suspend or ban users who’ve allegedly violated their terms of service. From a company’s perspective, deplatforming is a protection from potential legal actions. For others, it’s hoped that <a href="https://www.newstatesman.com/international/2021/01/ban-donald-trump-s-twitter-account-good">deplatforming might help stop</a> what some see as online mobs, intent on vandalising political, social, and financial institutions. </p>
<p>But deplatforming has proven ineffective in stifling these groups. When Trump was banned from social media, his <a href="https://www.independent.co.uk/life-style/gadgets-and-tech/trump-twitter-ban-parler-gab-b1785515.html">supporters quickly reorganised on Parler</a> – a social networking site that markets itself as the home of free speech. Shortly after, Parler was removed from the Apple and Google app stores, and <a href="https://www.bbc.co.uk/news/technology-55608081">Amazon Web Services</a> – who provided the digital infrastructure for the platform – removed Parler from its servers.</p>
<p>With Parler offline, Trump’s supporters began looking for alternative social media apps, including MeWe and CloudHub, which both <a href="https://techcrunch.com/2021/01/11/following-riots-alternative-social-apps-and-private-messengers-top-the-app-stores/">rose rapidly up the app store rankings</a>, organised by volume of downloads. Similarly, after the Discord ban, Reddit investors quickly <a href="https://ambcrypto.com/xrp-to-rally-tomorrow-wsb-and-telegram-hopes-so/">reorganised themselves on the messaging service Telegram</a>. These “Whac-a-Mole” dynamics, with deplatformed groups rapidly reforming on other platforms, is strikingly similar to what my research team and I have observed on the dark web.</p>
<h2>Dark dynamics</h2>
<p>The dark web is a hidden part of the internet that’s easily accessible through specialised web browsers such as TOR. Illicit trade is rife on the dark web, especially in dark “marketplaces”, where users trade goods using cryptocurrencies such as Bitcoin. Silk Road, regarded as the first dark marketplace, launched in 2011 and mostly sold drugs. Shut down by the FBI in 2013, it was followed by dozens of dark marketplaces which also traded in weapons, fake IDs and stolen credit cards.</p>
<figure class="align-center ">
<img alt="A web browser showing Silk Road website and a list of drugs for sale on it." src="https://images.theconversation.com/files/382730/original/file-20210205-15-whgsbj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/382730/original/file-20210205-15-whgsbj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/382730/original/file-20210205-15-whgsbj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/382730/original/file-20210205-15-whgsbj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/382730/original/file-20210205-15-whgsbj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=565&fit=crop&dpr=1 754w, https://images.theconversation.com/files/382730/original/file-20210205-15-whgsbj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=565&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/382730/original/file-20210205-15-whgsbj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=565&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Anonymous marketplaces like Silk Road are commonly removed from the dark web, causing user migration.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/san-francisco-us-august-31-2018-1168698142">Jarretera/Shutterstock</a></span>
</figcaption>
</figure>
<p>My collaborators and I looked at what happens after a dark marketplace is shut down by a police raid or an “exit scam” – where the marketplace’s moderators suddenly close the website and disappear with the users’ funds. We focused on “migrating” users, who move their trading activity to a different marketplace after a closure.</p>
<p>We found that most users <a href="https://www.nature.com/articles/s41598-020-74416-y">flocked to the same alternative marketplace</a>, typically the one with the highest amount of trading. User migration took place within hours, possibly coordinated via a <a href="https://news.bitcoin.com/after-empires-exit-scam-darknet-market-patrons-scramble-to-find-alternatives/">discussion forum such as Reddit or Dread</a>, and the overall amount of trading across the marketplaces quickly recovered. So, although individual marketplaces can be fragile, with participants being exposed to losses due to scams, this coordinated user migration guarantees the marketplaces’ overall resilience, so that new ones continue to flourish.</p>
<h2>Platform promiscuity</h2>
<p>Back in 2006, Facebook was competing for dominance against other social networks such as MySpace, Orkut, Hi5, Friendster and Multiply. When Facebook started to dominate the scene, <a href="https://arxiv.org/pdf/1307.1354.pdf;">network effects made it unstoppable</a>. </p>
<p>Put simply, network effects compound platform dominance because you and I are most likely to join networking platforms our friends are already on. Given this tendency, Facebook and Twitter grew to host billions of users, and Hi5 disappeared. By the time their dominance had crystallised, a ban from Facebook or Twitter would have meant total ostracisation from the online community.</p>
<p>In 2021, everything is different. Global communities organised by interests or political opinion are now established, and are able to quickly formulate emergency evacuation or migration plans. Members are usually in contact on several channels – even “dormant” channels few users are active upon. As dark markets show, dormant channels can become active when they’re required. </p>
<p>All this means that being banned from Twitter, Facebook, Instagram, Snapchat, Twitch and others no longer results in your isolation, or in your community being disbanded. Instead, just like on the dark web, deplatforming simply requires users to migrate to a new home, which they do in a matter of hours. </p>
<p>Deplatforming is clearly an ineffective strategy for stopping disruptive groups from forming and coordinating online. This means that policing online conversation will be harder in the future. Whether this is seen as good or bad will depend on the specific circumstances and - of course - your point of view.</p><img src="https://counter.theconversation.com/content/154427/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrea Baronchelli does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Deplatformed groups can all too easily flock to alternative platforms to coordinate.Andrea Baronchelli, Associate Professor, Department of Mathematics, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1544482021-02-05T13:07:10Z2021-02-05T13:07:10ZThe First Amendment will likely protect the anonymity of Redditors who discussed GameStop stock<figure><img src="https://images.theconversation.com/files/382558/original/file-20210204-18-3nijkm.jpg?ixlib=rb-1.1.0&rect=142%2C37%2C4730%2C3091&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">GameStop logo is seen at one of their stores in Athens, Ohio.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/gamestop-logo-is-seen-at-one-of-their-stores-in-athens-news-photo/1230960351?adppopup=true">Stephen Zenner/SOPA Images/LightRocket via Getty Images</a></span></figcaption></figure><p>GameStop, the video game retail chain, saw its <a href="https://www.nytimes.com/2021/01/27/business/gamestop-wall-street-bets.html">stock rise as much as 1,800%</a> in January 2021 after fans, who believe the stock was unfairly devalued by large investors, <a href="https://www.washingtonpost.com/business/2021/01/28/gamestop-stocks-reddit/">championed the stock’s purchase</a>.</p>
<p>Because <a href="https://www.reddit.com/r/wallstreetbets/">WallStreetBets</a>, an online group on the social news platform Reddit, <a href="https://theconversation.com/gamestop-im-one-of-the-wallstreetbets-degenerates-heres-why-retail-trading-craze-is-just-getting-started-154584">generated intense interest in the stock</a>, some financial experts have <a href="https://qz.com/1965494/are-wallstreetbets-reddit-traders-manipulating-gamestop-shares/">speculated as to whether the group engaged in market manipulation</a> – that is, engaging in deceptive speech or stock purchasing tactics to artificially inflate the price of a stock.</p>
<p>Experts also wonder whether <a href="https://www.cnbc.com/2021/02/02/robinhood-raises-trading-limits-on-restricted-stocks-customers-can-buy-100-gamestop-shares-now.html">the commission-free investment app Robinhood</a> engaged in improper behavior when it restricted buyers’ ability to purchase GameStop shares, resulting in <a href="https://apnews.com/article/gamestop-reddit-stock-shares-update-38ca4dc3f3010c1253039445110e5a7a">their subsequent decline</a>.</p>
<p>As <a href="https://udayton.edu/directory/law/goldberg_erica.php">a law professor</a> who teaches classes on the <a href="https://www.law.cornell.edu/constitution/first_amendment">First Amendment</a>, I find the law’s lack of clarity on this issue fascinating.</p>
<p>Free speech protections offered by the First Amendment will likely protect many, if not all, of the anonymous posters on WallStreetBets from claims of market manipulation. </p>
<h2>Claims of market manipulation</h2>
<p>GameStop’s stock price skyrocketed in mid-January after members of WallStreetBets discovered that <a href="https://www.cnbc.com/2021/01/29/gamestop-short-sellers-are-still-not-surrendering-despite-nearly-20-billion-in-losses-this-year.html">hedge funds were short-selling the stock</a>, or betting that it would make them money when its share price declined. </p>
<p>Anonymous members of WallStreetBets then encouraged investors to purchase the GameStop stock, claiming it would go “<a href="https://www.vox.com/the-goods/22264303/wallstreetbets-reddit-gamestop-stocks-language-community">to the moon</a>” and severely harm Wall Street. By some estimates, <a href="https://www.vox.com/recode/2021/2/2/22261097/gamestop-wallstreetbets-short-seller-hedge-funds-losses-robinhood">short sellers have lost US$13 billion</a> so far this year.</p>
<p>The influx of new investors into a struggling company likely created a stock bubble that would eventually burst, <a href="https://www.cbsnews.com/news/gamestop-stock-down-gme-reddit-2021-02-04/">costing the investors</a> who purchased GameStop stock right before its decline. </p>
<p>Whether WallStreetBets members can be held responsible for market manipulation depends on whether the First Amendment protects their right to anonymous speech.</p>
<p>Market manipulation involves <a href="https://www.investor.gov/introduction-investing/investing-basics/glossary/market-manipulation">deceptive behavior that artificially changes the price</a> of a stock beyond its real value, so free speech is generally not a viable defense against these securities laws. Deceiving consumers to artificially inflate the price of a stock – often called a “<a href="https://www.cnbc.com/2021/01/28/gamestop-now-called-a-pump-and-dump-scheme-what-you-need-to-know.html">pump and dump</a>” scheme – is therefore not protected by the First Amendment. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/382660/original/file-20210205-24-k52o3c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="The bull of Wall Street." src="https://images.theconversation.com/files/382660/original/file-20210205-24-k52o3c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/382660/original/file-20210205-24-k52o3c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/382660/original/file-20210205-24-k52o3c.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/382660/original/file-20210205-24-k52o3c.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/382660/original/file-20210205-24-k52o3c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/382660/original/file-20210205-24-k52o3c.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/382660/original/file-20210205-24-k52o3c.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">By some estimates, Wall Street short sellers have lost $13 billion on GameStop so far this year.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/the-bull-of-wall-street-is-seen-during-the-pass-of-the-news-photo/1299704269?adppopup=true">Eduardo MunozAlvarez/VIEWpress</a></span>
</figcaption>
</figure>
<p>However, I’m confident that speech that is intended to express one’s true opinions about a stock – or the benefits of holding Wall Street <a href="https://www.washingtonpost.com/business/2021/01/30/financial-regulations-wall-street-sec-gamestop/">hedge funds accountable for their behavior</a> – is fully protected speech. </p>
<p>In many WallStreetBets postings, it’s difficult to tell whether an anonymous poster intended to deceive investors. The poster might have been sharing investing advice, commiserating with others or simply being silly and inflammatory. All of these examples are protected speech. </p>
<p>One Redditor claimed these investors were going to be part of “<a href="https://amp.reddit.com/r/wallstreetbets/comments/l8tj9q/i_love_seeing_the_way_that_some_of_you_retards/">deep f—ing history</a>,” which is a claim about forming part of a social movement.</p>
<p>Another said, “<a href="https://twitter.com/banks/status/1354783413782241280">Take the cash you can afford to lose and buy, buy, buy</a>.” This statement doesn’t indicate an optimistic view of how the stock will fare. Therefore, it likely does not amount to market manipulation and is protected speech.</p>
<p>In these two cases, a court is unlikely to unmask the Reddit posters and investigate whether they intended to deceive investors.</p>
<h2>Court precedent</h2>
<p>One thing that makes this case so interesting is that the Supreme Court has not addressed these points directly.</p>
<p>Without Supreme Court guidance, <a href="https://www.courtlistener.com/opinion/182446/in-re-anonymous-online-speakers/">courts of appeals</a> and trial courts have divided on standards for determining when a website can be compelled to release the identity of a poster after its users have allegedly engaged in unlawful activity.</p>
<p>This means that jurisdictions may differ on when Reddit can be forced to disclose the identity of an anonymous poster, if any lawsuits are brought against the Redditors.</p>
<p>If so, the threshold question will be whether the speech at issue is considered commercial speech. <a href="https://www.mtsu.edu/first-amendment/article/900/commercial-speech">Commercial speech</a>, which proposes or advertises an economic transaction, is afforded less First Amendment protection than other forms of advocacy. </p>
<p>Many WallStreetBets posts about GameStop do not propose a commercial transaction. </p>
<p>The posts involve <a href="https://www.cnbc.com/2021/01/29/gamestop-traders-could-force-hedge-funds-to-change-investing-tactics.html">discussions about Wall Street accountability</a> and how GameStop stock will do. These posts will likely merit a higher level of First Amendment protection and, thus, keep posters’ anonymity intact.</p>
<p>Whether the <a href="https://www.theverge.com/2021/2/3/22264960/sec-gamestop-amc-probe-fraudulent-social-media-posts">U.S. Securities and Exchange Commission</a> or a private individual is seeking an anonymous poster’s identity may determine the level of First Amendment protection given to the anonymous speaker.</p>
<p>In some federal and state jurisdictions, if a government agency is seeking release of the identity, it will have to show a compelling reason. Without unmasking a person’s identity, it would be difficult to prove market manipulation in this specific case, given the nature of the Reddit posts. </p>
<p>In others, a government agency like the SEC may simply have to show a good faith need for the information, which would likely include evidence of market manipulation. </p>
<p>In many jurisdictions, courts determining whether to force Reddit to reveal the identity of a poster will balance the First Amendment interest in anonymous speech against the validity of the claim of market manipulation. </p>
<p>In the GameStop case, many of the Redditors engaged in core, protected speech on a matter of public interest, so the First Amendment interest will be strong. </p>
<p>If a court decides to investigate a WallStreetBets post, it will want to see facts indicating that the post was deceptive and that the poster was intending to share materially false information. </p>
<p>Because a lot of what was posted was either bravado, sincere messages of solidarity or hope about the stock’s value, the First Amendment interests are likely to outweigh the need to identify the anonymous posters. </p>
<p>Perhaps for a select few, a court might find that there is sufficient evidence of market manipulation to force Reddit to expose the identity of the poster. This scenario would require evidence that the poster was being deceptive, which may be difficult to acquire given the nature of the Reddit posts. </p>
<p>The line between free speech and illegal market manipulation – and a determination of when blogs must unmask anonymous posters who may or may not be involved in market manipulation – will have to be drawn by the courts and ultimately resolved by the Supreme Court.</p>
<p>[<em>You’re smart and curious about the world. So are The Conversation’s authors and editors.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=youresmart">You can read us daily by subscribing to our newsletter</a>.]</p><img src="https://counter.theconversation.com/content/154448/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Erica Goldberg does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It’s up to the courts to draw a line between free speech and illegal market manipulation. And the Supreme Court has never ruled on this specific question.Erica Goldberg, Associate Professor of Law, University of DaytonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1541542021-02-04T13:13:38Z2021-02-04T13:13:38ZWall Street isn’t just a casino where traders can bet on GameStop and other stocks – it’s essential to keeping capitalism from crashing<figure><img src="https://images.theconversation.com/files/382356/original/file-20210203-17-l8h3t9.jpg?ixlib=rb-1.1.0&rect=56%2C156%2C2831%2C2271&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Traders on the floor of the New York Stock Exchange in 1955.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/NewYorkStockExchange1955/10406bc6b6a94ba681a2fa65c883fbf8/photo?Query=trading%20AND%20floor&mediaType=photo&sortBy=arrivaldatetime:asc&dateRange=Anytime&totalCount=5287&currentItemNo=31">AP Photo</a></span></figcaption></figure><p><a href="https://theconversation.com/why-gamestop-shares-stopped-trading-5-questions-answered-154255">Shares of GameStop</a> and other companies or <a href="https://www.kitco.com/charts/livesilver.html">assets that shot up</a> in value in recent weeks are now <a href="https://finance.yahoo.com/quote/GME/">dropping</a> <a href="https://www.washingtonpost.com/technology/2021/02/02/gamestop-stock-plunge-losers/">like stones</a>. While I feel sorry for the many investors who will likely lose a lot of money, the stocks’ return to Earth is actually a good thing – if you want to avoid financial meltdown to the long list of crises the U.S. is facing. </p>
<p>The reason has to do with what financial markets are – and what they are not – as well as what happens when prices of stocks and other securities become untethered from the fundamental value of the assets they’re meant to represent. </p>
<p>As a finance professor who does <a href="https://scholar.google.com/citations?user=JfUEmSUAAAAJ&hl=en">research on how markets respond to new information</a>, I believe it is important to maintain a close link between security prices and fundamentals. When that stops happening, a market collapse may be not far behind. </p>
<figure class="align-center ">
<img alt="Sillouettes of faces can be seen against slot machines and other gambling devices" src="https://images.theconversation.com/files/382359/original/file-20210203-23-127o48d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/382359/original/file-20210203-23-127o48d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=370&fit=crop&dpr=1 600w, https://images.theconversation.com/files/382359/original/file-20210203-23-127o48d.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=370&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/382359/original/file-20210203-23-127o48d.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=370&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/382359/original/file-20210203-23-127o48d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=465&fit=crop&dpr=1 754w, https://images.theconversation.com/files/382359/original/file-20210203-23-127o48d.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=465&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/382359/original/file-20210203-23-127o48d.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=465&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Although investors such as hedge funds engage in speculation, Wall Street isn’t meant to be like a casino.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/MassachusettsGamblingWynn/0e0c68a0a3d64eac81bcaedc155c64b2/photo?Query=casino%20AND%20floor&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=387&currentItemNo=45">AP Photo/Charles Krupa</a></span>
</figcaption>
</figure>
<h2>Capital markets aren’t casinos</h2>
<p><a href="https://www.nbcchicago.com/lx/gamestop-short-squeeze-wall-streets-david-and-goliath-story-explained-by-an-expert/2423671/">Some have portrayed</a> GameStop as a David vs. Goliath story. According to that narrative, the big guys on Wall Street have been getting rich gambling on the stock market for years. What’s the problem when the little guy gets a chance? </p>
<p>The first thing to keep in mind is that markets aren’t a big casino, <a href="https://www.tradersmagazine.com/departments/equities/the-stock-market-is-now-a-casino/">as some seem to believe</a>. Their core purpose is to efficiently connect investors with companies and other organizations that will make the most productive use of their cash. </p>
<p>Accurate market prices, meant to reflect a company’s expected profits and overall risk level, provide an important signal to investors whether they should hand over their money and what they should get in return. Companies like Apple and Amazon simply would not exist as we know them today without <a href="https://www.stlouisfed.org/education/tools-for-enhancing-the-stock-market-game-invest-it-forward/episode-1-understanding-capital-markets">access to capital markets</a>.</p>
<p>The more jaundiced view of markets focuses on episodes when <a href="https://ssrn.com/abstract=268311">markets seemingly go crazy</a> and on the <a href="https://ssrn.com/abstract=1622184">speculative gambling behavior of some traders</a>, such as <a href="https://hbswk.hbs.edu/item/the-problem-with-hedge-funds">hedge funds</a>. The GameStop saga feeds into this storyline.</p>
<p>But GameStop also illustrates what happens when stock prices don’t reflect reality.</p>
<h2>The GameStop bubble</h2>
<p>GameStop fundamentals <a href="https://news.gamestop.com/static-files/9d2139e1-31c7-498f-ad95-63db1e6d085a">are, to put it mildly, lackluster</a>.</p>
<p>The company is a brick-and-mortar chain of video game stores. Most video game sales now <a href="https://screenrant.com/digital-game-sales-consoles-outnumber-physical-first-time/">take place as digital downloads</a>. GameStop <a href="https://www.washingtonpost.com/business/2021/02/01/gamestop-retail-stores/">has been slow</a> to adapt to this new reality. Its revenue peaked in <a href="https://news.gamestop.com/static-files/8ddaae13-8fcc-4ea1-9ac6-0ea74d0d9d7c">2012 at US$9.55 billion</a> and had dropped by a third <a href="https://news.gamestop.com/static-files/9d2139e1-31c7-498f-ad95-63db1e6d085a">as of 2019</a>. It hasn’t earned a profit since 2017. Put simply, it is a money-losing company in a competitive and quickly changing industry. </p>
<p>The recent speculative frenzy, however, increased the GameStop stock price <a href="https://finance.yahoo.com/quote/GME/">from under $20 in early January to as high as $483</a> in a little over two weeks, <a href="https://www.wsj.com/articles/gamestop-stock-short-squeeze-ugly-side-11611750250">driven by retail investors on Reddit</a> who coordinated their buying to harm hedge funds – <a href="https://www.wsj.com/articles/gamestop-mania-reveals-power-shift-on-wall-streetand-the-pros-are-reeling-11611774663?mod=livecoverage_web">costing the professionals billions of dollars</a>. </p>
<p><iframe id="QN1Ez" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/QN1Ez/5/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>It is <a href="https://marker.medium.com/gamestop-proves-were-in-a-meme-stock-bubble-b3f39163a77f">clearly a speculative price bubble</a> and has some characteristics of a Ponzi scheme. Many small investors who “get on the train” late and buy at the inflated prices – especially <a href="https://ssrn.com/abstract=1151595">those attracted by the extreme price moves</a> and media coverage – will be left holding the bag.</p>
<p>And sooner or later, the stock price will likely come back to Earth to a level that can be supported by the fundamentals of the company. Shares <a href="https://www.marketwatch.com/investing/stock/gme">closed on Feb. 4 at $53.50</a>, the lowest since Jan. 21. </p>
<p>The problems begin when that doesn’t happen until too late.</p>
<h2>Bubbles are made to pop</h2>
<p>Financial markets are made up of people. People are imperfect, and so are markets. This means market prices are not always “right” – and it’s often hard to know what the “right” price is. </p>
<p>That is true when it comes to the price bubbles in individual stocks like GameStop. But it’s also true on a much bigger scale, when it comes to a market as a whole. </p>
<p>Price bubbles and crashes are good for neither Wall Street nor Main Street. When the dot-com bubble popped in 2000 – <a href="https://www.investopedia.com/terms/d/dotcom-bubble.asp">after prices of dozens of tech stocks soared exponentially in the late 1990s</a> – an <a href="https://time.com/3741681/2000-dotcom-stock-bust">economic recession</a> followed soon after. The bursting of a <a href="https://www.investopedia.com/terms/h/housing_bubble.asp">housing bubble in 2008</a> <a href="https://www.history.com/topics/21st-century/recession">triggered a global financial crisis and the Great Recession</a>.</p>
<figure class="align-center ">
<img alt="A boys makes a large soap bubble." src="https://images.theconversation.com/files/382360/original/file-20210203-21-1tp1sm0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/382360/original/file-20210203-21-1tp1sm0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=480&fit=crop&dpr=1 600w, https://images.theconversation.com/files/382360/original/file-20210203-21-1tp1sm0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=480&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/382360/original/file-20210203-21-1tp1sm0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=480&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/382360/original/file-20210203-21-1tp1sm0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=603&fit=crop&dpr=1 754w, https://images.theconversation.com/files/382360/original/file-20210203-21-1tp1sm0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=603&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/382360/original/file-20210203-21-1tp1sm0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=603&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The bigger the bubble, the bigger the ‘pop.’</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/young-boy-blows-large-soap-bubble-royalty-free-image/114931642">Robin Knight/Moment via Getty Images</a></span>
</figcaption>
</figure>
<h2>Too much momentum</h2>
<p>So markets fail sometimes, and we need sensible regulation and enforcement to make such failures less likely. </p>
<p>Taken in isolation, the GameStop craze is unlikely to trigger a disruption to the overall stock market, especially if its price continues to fall more in line with the company’s fundamental value. Unfortunately, this was not an isolated case. Nor was GameStop the first sign of problems. </p>
<p>In recent days, Reddit users have also driven up the <a href="https://www.cnbc.com/2021/02/02/is-silver-the-next-gamestop.html">prices of silver</a> and <a href="https://www.washingtonpost.com/business/2021/01/28/gamestop-stocks-reddit/">companies</a> such as BlackBerry and movie theater giant AMC Entertainment. Popular trading apps like Robinhood <a href="https://www.wsj.com/articles/when-the-stock-market-is-too-much-fun-11607705516">have made trading easy, fun</a> and basically free.</p>
<p>[<em>Deep knowledge, daily.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=deepknowledge">Sign up for The Conversation’s newsletter</a>.]</p>
<p>The share price of Tesla, for example, <a href="https://finance.yahoo.com/quote/TSLA/">skyrocketed 720% last year</a>, in large part when investors bought the stock because it was already rising. This is called <a href="https://www.wsj.com/articles/day-trader-mania-will-challenge-sec-under-gensler-bidens-choice-for-chairman-11611961219/">momentum investing</a>, a trading strategy in which investors buy securities because they are going up – selling them only when they think the price has peaked. </p>
<p>If this continues, it will likely lead to more financial bubbles and crashes that could make it harder for companies to raise capital, posing a threat to the <a href="https://www.politico.com/news/2021/01/27/fed-us-economic-recovery-weakening-463190">already limping U.S. economic recovery</a>. Even if the worst doesn’t happen, large price movements and allegations of price manipulation <a href="https://www.politico.com/news/2021/01/29/wall-street-washington-crackdown-gamestop-463935">could hurt public confidence</a> in financial markets, which would make people more reluctant to invest in retirement and other programs.</p>
<p>Warren Buffett <a href="https://markets.businessinsider.com/news/stocks/warren-buffett-21-best-quotes-2019-2-1027944381">once said</a> about stock market behavior: “The light can at any time go from green to red without pausing at yellow.” </p>
<p>What he meant was that markets can turn on a dime and plunge. He saw these moments as opportunities to find deals in the market, but for most people they result in panic, heavy losses and economic consequences like mass unemployment – as we saw in 1929, 2000 and 2008. </p>
<p>There’s no particular reason it won’t happen again.</p><img src="https://counter.theconversation.com/content/154154/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alexander Kurov does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Market prices are supposed to reflect a company’s fundamental value. When they no longer do, bad things can happen.Alexander Kurov, Professor of Finance and Fred T. Tattersall Research Chair in Finance, West Virginia UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1543552021-02-03T19:09:40Z2021-02-03T19:09:40ZWallStreetBets is disrupting financial markets — possibly permanently<figure><img src="https://images.theconversation.com/files/382265/original/file-20210203-17-bnks50.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C4923%2C3242&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A street sign is displayed at the New York Stock Exchange in New York.</span> <span class="attribution"><span class="source">(AP Photo/Seth Wenig)</span></span></figcaption></figure><p>If the financial world follows the pattern seen a decade or so ago in other markets, such as <a href="https://doi.org/10.1086/680671">fashion and music</a>, Reddit’s <a href="https://www.reddit.com/r/wallstreetbets/">WallStreetBets (r/wallstreetbets)</a> phenomenon might have transformed investing forever. </p>
<p>In the fashion, financial and music markets, hundreds of thousands of people are highly engaged and share their passion online, and can fuel significant transformations <a href="https://www.wsj.com/articles/keith-gill-drove-the-gamestop-reddit-mania-he-talked-to-the-journal-11611931696">without necessarily wanting to do so</a>. </p>
<p>WallStreetBets is now reshaping financial markets in three important ways: Amateur market participants, or <a href="https://www.investopedia.com/terms/r/retailinvestor.asp">retail investors</a>, have taken on work traditionally done by financial advisers, analysts and educators, changing who does what in the market. They’ve introduced new ways of thinking about investing. And they’ve strengthened the influence of retail investors across the board.</p>
<p>In response, professional financial stakeholders are trying to delegitimize retail investors to maintain their influence. </p>
<h2>Who does what and how?</h2>
<p>The changes have been brought about by retail investors meeting and exchanging information online, such as <a href="https://www.reddit.com/r/investing/">on Reddit forums</a>, Discord groups, <a href="https://www.youtube.com/c/RoaringKitty">YouTube channels</a>, Twitter and Stocktwits, on how to perform the type of work traditionally done by financial sector advisers and analysts. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/382286/original/file-20210203-21-ula5hk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="The Reddit logo on a mobile device." src="https://images.theconversation.com/files/382286/original/file-20210203-21-ula5hk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/382286/original/file-20210203-21-ula5hk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=419&fit=crop&dpr=1 600w, https://images.theconversation.com/files/382286/original/file-20210203-21-ula5hk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=419&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/382286/original/file-20210203-21-ula5hk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=419&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/382286/original/file-20210203-21-ula5hk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=527&fit=crop&dpr=1 754w, https://images.theconversation.com/files/382286/original/file-20210203-21-ula5hk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=527&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/382286/original/file-20210203-21-ula5hk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=527&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The Reddit logo on a mobile device in New York.</span>
<span class="attribution"><span class="source">(AP Photo/Tali Arbel)</span></span>
</figcaption>
</figure>
<p>Instead of getting their investment education the usual way, via courses at colleges and universities, retail investors learned online, among themselves.</p>
<p>Consequently, retail investors have spurred changes in the work performed by professional financial advisers, analysts and educators, as well as institutional investors. Some have argued that the greater transparency regarding the investment techniques being discussed openly online could “<a href="https://markets.businessinsider.com/news/stocks/chamath-palihapitiya-wallstreetbets-traders-analysis-hedge-funds-gamestop-retail-stocks-2021-1-1030011632">force greater transparency on the institutional side</a>.” </p>
<h2>New ways to think about investing</h2>
<p>These new retail investors are also fuelling a different way of thinking about investing. At least for some members of WallStreetBets, investing is part bet, part joke, part driven by <a href="https://www.reddit.com/r/wallstreetbets/comments/hrorfa/i_will_invest_100000_into_whatever_is_the_top/">mischievous Redditors</a> and part get-rich-quick scheme. </p>
<p>For others, WallStreetBets represents an opportunity to <a href="https://www.bloomberg.com/news/articles/2020-02-26/reddit-s-profane-greedy-traders-are-shaking-up-the-stock-market">exploit and expose weaknesses</a> in the financial markets. Others, though, <a href="https://isthesqueezesquoze.com/">are competent</a> <a href="https://www.vice.com/en/article/nedzqm/you-probably-shouldnt-bet-your-savings-on-reddits-wallstreetbets">investors</a>. </p>
<p>Whatever the goal pursued, the beliefs and risky behaviour of this new breed of retail investors are a far cry from those that often characterize typical stock market investors, many of whom heed financial advisers and favour long-term investments in safe opportunities like blue chip stocks, mutual funds or, for the riskier investor, <a href="https://www.investopedia.com/terms/e/etf.asp">exchange-traded funds, or ETFs</a>.</p>
<p>These contrasting beliefs are the topic of many <a href="https://www.reddit.com/r/wallstreetbets/comments/k94xpm/the_great_war_between_wsb_and_traditional/">humorous videos</a> <a href="https://knowyourmeme.com/memes/sites/wallstreetbets/">and memes</a>.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1356358275810390025"}"></div></p>
<h2>Retail investors gaining influence</h2>
<p>Until now, retail investors have usually been the customers of financial institutions. Institutional investors, such as large banks and hedge funds and their wealthy clients, were traditionally seen as the “<a href="https://www.investopedia.com/terms/s/smart-money.asp">smart money</a>” who influence the movement of markets. Smart money is typically portrayed as involving successful, respected investors who possess important knowledge of financial markets. </p>
<p>In contrast, WallStreetBets’ members are known for the self-deprecating ways they describe themselves, typically <a href="https://www.urbandictionary.com/define.php?term=YOLOing">as “yoloing”</a> cuckolds and degenerates, painting a clear contrast to the supposedly respectable smart money investors. Yet this influential group comprises “<a href="https://finance.yahoo.com/news/fighting-100-mini-mike-tysons-the-powerful-influence-of-reddit-trade-141009102.html">100s of mini Mike Tysons</a>” who together yielded enough power to cause <a href="https://www.wsj.com/articles/melvin-capital-lost-53-in-january-hurt-by-gamestop-and-other-bets-11612103117">billions of dollars in losses</a> to <a href="https://www.bloomberg.com/news/articles/2021-01-27/bros-on-reddit-bludgeon-melvin-capital-in-warning-to-wall-street">established financial firms</a>.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/gamestop-im-one-of-the-wallstreetbets-degenerates-heres-why-retail-trading-craze-is-just-getting-started-154584">GameStop: I'm one of the WallStreetBets 'degenerates' – here's why retail trading craze is just getting started</a>
</strong>
</em>
</p>
<hr>
<h2>Reactions by finance professionals</h2>
<p>Whether they’re fashion houses or record companies or hedge funds and wealth management companies, people in power typically try to undermine the threat posed by market transformations that could upend their business model and minimize their influence.</p>
<p>In the financial world, reactions to WallStreetBets have been varied. Trading platforms have tried to curb the power of Redditors by <a href="https://www.nytimes.com/live/2021/01/28/business/us-economy-coronavirus">limiting transactions</a> under the rationale of <a href="https://www.cnbc.com/2021/01/28/robinhood-ceo-says-it-limited-buying-in-gamestop-to-protect-the-firm-and-protect-our-customers.html">protecting consumers</a>. Many analysts and investors have also derided WallStreetBets investors as uneducated people who might lose their shirts on their bets. </p>
<p>In much of the news coverage, analysts <a href="https://markets.businessinsider.com/news/stocks/leon-cooperman-gamestop-surge-will-end-very-badly-for-public-2021-1-1030019230?fbclid=iwar3bxha3wltg93ns-amdkm8fv4wz-kfon2lvzfofmivughdgjoz-lqmnua0">have reaffirmed their knowledge of the financial markets</a> and levelled insults at the WallStreetBets investors. Billionaire and hedge fund manager Leon Cooperman of Omega Advisors had this to say:</p>
<blockquote>
<p>“The reason the market is doing what it’s doing is people are sitting at home, getting their checks from the government, basically trading for no commissions and no interest rates.” </p>
</blockquote>
<h2>What the future holds</h2>
<p>As of Feb. 1, there were about eight million members on Reddit’s WallStreetBets, but it’s only one of many online sites where retail investors are learning, interacting and sharing investment ideas. Together, these amateur investors are altering some long-held beliefs about investing and they’re gaining influence in the market in the process.</p>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/382295/original/file-20210203-23-1so47g3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A customer checks on his cellphone as he walks to a GameStop store." src="https://images.theconversation.com/files/382295/original/file-20210203-23-1so47g3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/382295/original/file-20210203-23-1so47g3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/382295/original/file-20210203-23-1so47g3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/382295/original/file-20210203-23-1so47g3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/382295/original/file-20210203-23-1so47g3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/382295/original/file-20210203-23-1so47g3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/382295/original/file-20210203-23-1so47g3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">A customer checks his cellphone as he walks to a GameStop store in Vernon Hills, Ill., on Jan. 28, 2021.</span>
<span class="attribution"><span class="source">(AP Photo/Nam Y. Huh)</span></span>
</figcaption>
</figure>
<p>These retail investors aren’t part of an organized movement trying to transform the workings of the financial market. Yet, as <a href="https://www.vox.com/the-goods/22249458/gamestop-stock-wallstreetbets-reddit-citron">the GameSpot saga</a> exemplifies, their online interactions have reshaped the power dynamic between retail and institutional investors. WallStreetBets Redditors helped propel GameStop’s stock price to soar, forcing a halt in trading.</p>
<p>What does the future hold for the financial world? Take your bet.</p><img src="https://counter.theconversation.com/content/154355/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pierre-Yann Dolbec receives funding from the Social Sciences and Humanities Research Council, the Fonds de Recherche du Québec, and Concordia University. </span></em></p>WallStreetBets is now reshaping financial markets: Non-professional market participants, or retail investors, are doing the work traditionally performed by financial advisers and analysts.Pierre-Yann Dolbec, Assistant professor in marketing and Research Chair in Complexity and Markets, Concordia UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1545842021-02-03T15:21:07Z2021-02-03T15:21:07ZGameStop: I’m one of the WallStreetBets ‘degenerates’ – here’s why retail trading craze is just getting started<figure><img src="https://images.theconversation.com/files/382250/original/file-20210203-21-14zslwq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">We're not going away. </span> <span class="attribution"><a class="source" href="https://theconversation.com/drafts/154527/edit">Rafapress</a></span></figcaption></figure><p>I joined the WallStreetBets forum on Reddit almost two years ago. But I was far from the image of the typical “bored, young Reddit trader” that has been portrayed in the media lately. I had worked in banking, and been a retail investor for more than 15 years – in addition to teaching financial management at a Russell Group university for more than eight years. </p>
<p>The average profile of members was similar to mine in terms of knowledge and experience – only much younger and with much deeper pockets than me, I think. The forum had just above a million members and it was a good source of learning and information. </p>
<p>The users referred to themselves as “degenerates” or “retards” (an anagram for “traders”) and, when they posted their analysis of possible trading opportunities, it was known as “DD” or due diligence. These DDs would be very detailed, just like the kind of analysis that the now famous <a href="https://www.wsj.com/articles/keith-gill-drove-the-gamestop-reddit-mania-he-talked-to-the-journal-11611931696">Keith Gill</a> – aka DeepFuckingValue – <a href="https://www.youtube.com/watch?v=GZTr1-Gp74U">would later post</a> on computer games retailer <a href="https://www.reddit.com/r/wallstreetbets/comments/jl84wk/gamestop_technical_dd_on_how_this_gaming_cycle/">GameStop</a>, which led to the 100-fold price surge that has recently taken the world by storm.</p>
<p><strong>Keith Gill’s July 2020 analysis of GameStop</strong></p>
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<iframe width="440" height="260" src="https://www.youtube.com/embed/GZTr1-Gp74U?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
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<p>These DDs were scrutinised and discussed by members and any discrepancies in arguments or data were usually identified quickly. Existing members continually reminded newcomers about the risks involved with suggested trades and cautioned that anyone putting more than 2% of their total capital into a risky trade was <a href="https://www.reddit.com/r/wallstreetbets/wiki/money_mangement">making a mistake</a>.</p>
<p>The most important feature of the forum was transparency. Members regularly shared the status of their trade – both losses and profits. Traders like Gill even <a href="https://www.reddit.com/user/DeepFuckingValue/">regularly posted</a> the status of their portfolio, <a href="https://www.reddit.com/r/wallstreetbets/search?sort=top&q=flair%3ALoss&restrict_sr=on&t=week">including losses</a>. </p>
<h2>The games begin</h2>
<p>The forum started discussing GameStop around a year ago. But at that time it was just a trading opportunity. There wasn’t any talk of taking down hedge funds or a war with Wall Street until two months ago. In January 2021, based on the discussion in the forum, I bought 11 shares in GameStop, in gradual steps ranging in price from US$80 to US$350 (averaging US$200) as a calculated trade based on the available information at the time. </p>
<p>By late January, it had become a frenzy as forum members piled into GameStop and other stocks, including BlackBerry and cinema group AMC Entertainment, using low-fee trading platforms such as Robinhood. This was based on <a href="https://theconversation.com/gamestop-hedge-fund-attacks-have-opened-up-powerful-new-front-against-wall-street-154284">the knowledge</a> that many hedge funds had bet heavily on these share prices to go down (known as “short positions”), and that driving them up would cost big investors a fortune. In the event, the damage has run to billions of dollars and some players, including <a href="https://www.cityam.com/hedge-fund-melvin-capital-bags-billions-from-investors-following-gamestop-debacle/">Melvin Capital</a>, <a href="https://www.bloomberg.com/news/articles/2021-01-27/hedge-fund-maplelane-loses-about-33-on-short-bets-this-month">Maplelane</a> and <a href="https://www.cnbc.com/2021/01/29/citron-research-short-seller-caught-up-in-gamestop-squeeze-pivoting-to-finding-long-opportunities.html">Citron</a>, got burned. </p>
<p>The WallStreetBets forum has grown exponentially. The number of members now stands at 8.4 million and still rising, and it is almost impossible to follow the discussion or extract information from the barrage of posts. Even the founders of the forum <a href="https://markets.businessinsider.com/news/stocks/wall-street-bets-founder-says-reddit-fueled-frenzy-is-a-train-wreck-2021-1-1030019048">have complained</a> that it is a victim of its own success. </p>
<p>The response from the trading apps has been questionable in my opinion. They either <a href="https://www.theguardian.com/business/2021/jan/28/gamestop-shares-robinhood-app-ban-blackberry-amc-nokia-reddit">stopped or severely restricted</a> buying by individual traders while allowing everyone to sell, thus suppressing demand and price. And these restrictions were only for retail traders - not hedge funds. </p>
<p><a href="https://www.ft.com/content/17450cc8-506d-4c3c-928c-628f5f92efa8">Outraged retail investors</a> are bringing more than <a href="https://www.pcmag.com/news/robinhood-now-faces-over-30-class-action-lawsuits-for-blocking-stock-buys">30 class-action lawsuits</a> against Robinhood, and a <a href="https://www.coindesk.com/us-congress-plans-hearings-on-gamestop-market-pumps">house committee hearing</a> by US lawmakers is expected later in February. The New York attorney general, Letitia James, <a href="https://ag.ny.gov/press-release/2021/attorney-general-james-reviewing-robinhood-app-activity">is reviewing</a> Robinhood’s reaction, while prominent figures like CNN host <a href="https://www.youtube.com/watch?v=6fs_lyGn4YA">Chris Cuomo</a>, <a href="https://www.telegraph.co.uk/technology/2021/02/01/robinhood-boss-promises-elon-musk-relax-gamestop-limits-live/">Tesla’s Elon Musk</a> and tech investor <a href="https://www.institutionalinvestor.com/article/b1q912xzmy84jm/The-Triumph-of-Dumb-Money">Chamath Palihapitiya</a> have openly questioned whether Robinhood imposed the restrictions to favour hedge funds with short positions. <a href="https://www.livemint.com/companies/news/gamestop-frenzy-puts-spotlight-on-trading-giant-citadel-securities-11612204544485.html">Notably</a>, one of the main customers for the user data that Robinhood sells is Citadel Securities, which is one of Melvin Capital’s backers. </p>
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<p>Robinhood <a href="https://www.pcmag.com/news/robinhood-now-faces-over-30-class-action-lawsuits-for-blocking-stock-buys">responded that</a> it <a href="https://fortune.com/2021/02/02/robinhood-gamestop-restricted-trading-meme-stocks-gme-amc-vlad-tenev-nscc/">imposed the restrictions</a> temporarily <a href="https://gulfnews.com/special-reports/mystery-surrounding-robinhood-app-and-gamestop-price-spike-now-unravelled-1.1612267566233">while it raised</a> additional funding to cover a huge hike in the amounts the clearing houses were demanding to cover the period until each trade settled. It has <a href="https://techcrunch.com/2021/02/01/robinhoods-long-weekend-brings-a-total-of-3-4-billion-to-its-balance-sheet/?guccounter=1&guce_referrer=aHR0cHM6Ly9uZXdzLmdvb2dsZS5jb20v&guce_referrer_sig=AQAAANwPecrjxzzYBqpItNsS5kuuTSMm8tDwZoqpbRd_OZINbpFNVm3u7FFH7OML7Mzmqy0vOg2ERShvn3Irq9vdq_SDISNnz-QwG0vt3MHqrKi1y6fSpooEHa7HGJKA3_wYjV8ijmlszRWVuCnq219_se463svUoot2nksOzDQM4IHz">since raised</a> over US$3 billion from backers and has partially lifted the restrictions. </p>
<h2>The new rock’n’roll</h2>
<p>Beyond this individual Reddit forum, a wider change seems to be taking place. For the past few weeks, most of the fastest-growing communities on Reddit are related to investment and trading discussions. And this trend is spreading across the world. Similar forums have emerged in the <a href="https://www.ft.com/content/acc1dbfe-80a4-4b63-90dd-05f27f21ceb2">UK, Europe</a> and <a href="https://www.ft.com/content/f26a2ed8-3fea-41b6-9de7-066ef2be3bf2">Malaysia</a>.</p>
<p><strong>Reddit’s fastest growing communities</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/382222/original/file-20210203-23-76w011.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Reddit's top-growing communities" src="https://images.theconversation.com/files/382222/original/file-20210203-23-76w011.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/382222/original/file-20210203-23-76w011.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=380&fit=crop&dpr=1 600w, https://images.theconversation.com/files/382222/original/file-20210203-23-76w011.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=380&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/382222/original/file-20210203-23-76w011.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=380&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/382222/original/file-20210203-23-76w011.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=477&fit=crop&dpr=1 754w, https://images.theconversation.com/files/382222/original/file-20210203-23-76w011.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=477&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/382222/original/file-20210203-23-76w011.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=477&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://frontpagemetrics.com/">Reddit</a></span>
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</figure>
<p>There is also the realisation among institutional investors that social media users working collectively are capable of exposing carefully hidden information and spreading it like wildfire. It may mean that more people may choose to manage their own investments in future rather than paying generous fees to hedge funds and other financial institutions to do it for them. </p>
<p>It may also lead to significant changes in <a href="https://www.investmentnews.com/advisers-ponder-systemic-risks-to-markets-as-gamestop-spins-out-of-control-201984">risk management</a> and disclosure practices. For example, Citron, which specialises in taking short positions, says it will <a href="https://financialpost.com/investing/citron-research-andrew-left-stop-short-selling-research-publishing">no longer</a> put its research into the public domain. </p>
<p>On a more social level, this phenomenon appears to have made young people <a href="https://www.theguardian.com/commentisfree/2021/feb/02/my-teenage-son-joined-gamestop-gold-rush-how-worried-should-i-be">much more interested</a> in how the financial markets work. Social media forums and commission-free trading appears to be creating a <a href="https://www.vox.com/business-and-finance/2020/7/9/21314119/stock-market-day-trading-reddit-dave-portnoy-barstool-robinhood">new generation</a> of investors. </p>
<p>This <a href="https://www.theguardian.com/business/2021/jan/28/sending-a-message-gamestop-investors-on-why-they-bought-shares">democratisation of capital markets</a> may be a solution to <a href="https://www.theatlantic.com/business/archive/2015/10/retirement-savings-dont-blame-people/408283/">the indifference</a> that has long existed among the ordinary population towards saving and investing - reversing a trend that has existed for more than three decades. </p>
<p>As for me and my 11 shares in GameStop – currently worth US$990, or about half of what I paid for them – I plan to hold them for two reasons. The company now has the support of 8.4 million WallStreetBets members as potential customers, many of whom are also the primary customers for its gaming products. GameStop is now also a well recognised brand among young social media users across the world. Wish me luck.</p><img src="https://counter.theconversation.com/content/154584/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mohammad Rajjaque owns shares in GameStop and a member of Wallstreetbets forum. </span></em></p>Now that Gen Z has got a taste for financial trading, the whole game has changed.Mohammad Rajjaque, Program Director, Accounting and Financial Management Division, University of SheffieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1544702021-02-03T02:35:34Z2021-02-03T02:35:34ZAfter GameStop, the rise of Dogecoin shows us how memes can move markets<figure><img src="https://images.theconversation.com/files/382115/original/file-20210203-21-119vb8y.jpg?ixlib=rb-1.1.0&rect=33%2C0%2C5478%2C3660&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>One of the most difficult problems in finance right now is figuring out the fundamental economic value of cryptocurrencies. And the past week has complicated this further.</p>
<p>For many cryptocurrency investors, the value of Bitcoin is based on the fact it is artificially scarce. A hard cap on “<a href="https://www.investopedia.com/tech/how-does-bitcoin-mining-work/">minting</a>” new coins means there will only ever be 21 million Bitcoin in existence. And unlike national currencies such as the Australian dollar, the rate of release for new Bitcoin is slowing down over time.</p>
<p>Dogecoin, a cryptocurrency that takes its name and logo from <a href="https://en.wikipedia.org/wiki/Doge_(meme)">a Shiba Inu meme</a> that was popular several years ago, <em>doesn’t</em> have a cap. Launched in 2013, there are now 100 billion Dogecoin in existence, with as many as five billion new coins minted each year.</p>
<p>But how can a currency with a seemingly unlimited supply have any value at all?
And why did Dogecoin’s price suddenly surge <a href="https://www.coindesk.com/dogecoin-price-record-high">more than 800%</a> in 24 hours on January 29? </p>
<p>At the time of publication, the “memecoin” was <a href="https://coinmarketcap.com/">worth about</a> A$5.6 billion on the stockmarket.</p>
<h2>A long-running joke brought to life</h2>
<p>Dogecoin is one of the original “altcoins”: <a href="https://www.techradar.com/au/news/what-are-altcoins-everything-you-need-to-know">cryptocurrencies</a> released in the few years after the pseudonymous Satoshi Nakamoto first released Bitcoin into the wild.</p>
<p>From a technical perspective, Dogecoin isn’t very innovative. Like many early altcoins, it’s based on the original source code of Bitcoin. </p>
<p>Or more technically, it’s based on <a href="https://litecoin.org/">Litecoin</a>, which in turn was based on Bitcoin — but with some small modifications such as faster transactions and the removal of the supply cap. But Dogecoin is much more interesting when seen through a cultural lens. </p>
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<strong>
Read more:
<a href="https://theconversation.com/why-is-bitcoins-price-at-an-all-time-high-and-how-is-its-value-determined-152616">Why is Bitcoin's price at an all-time high? And how is its value determined?</a>
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<p>The cryptocurrency was created by software engineers Billy Markus and Jackson Palmer — although Palmer, an Australian, has since walked away from the project. They branded it with the Doge meme partly to be funny, but also to distance it from <a href="https://www.vice.com/en/article/jp5x3d/dogecoins-founders-believe-in-the-power-of-meme-currencies">Bitcoin’s then questionable reputation</a> as a currency for illicit transactions.</p>
<p>Now, Dogecoin has outlasted almost all the early derivative altcoins and has a thriving community of investors. In 2014, Dogecoin holders <a href="https://www.theguardian.com/technology/2014/jan/20/jamaican-bobsled-team-raises-dogecoin-winter-olympics">sponsored</a> the Jamaican Bobsled Team. <a href="https://www.theguardian.com/technology/2014/mar/27/nascar-dogecoin-sponsor-josh-wise-talladega-superspeedway">Soon after</a>, they sponsored a NASCAR driver. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/381875/original/file-20210202-15-1xn491e.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A Dogecoin-sponsored matchbox." src="https://images.theconversation.com/files/381875/original/file-20210202-15-1xn491e.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/381875/original/file-20210202-15-1xn491e.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/381875/original/file-20210202-15-1xn491e.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/381875/original/file-20210202-15-1xn491e.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/381875/original/file-20210202-15-1xn491e.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/381875/original/file-20210202-15-1xn491e.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/381875/original/file-20210202-15-1xn491e.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">This toy matchbox car was purchased at a cryptoparty auction. It’s modelled after Dogecar ‘#98 Moonrocket’, driven in the Talladega Superspeedway NASCAR races.</span>
<span class="attribution"><span class="source">Ellie Rennie</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p><a href="https://finance.yahoo.com/news/elon-musk-tweets-support-dogecoin-015609684.html">Elon Musk</a>, the world’s richest man, is among the cryptocurrency’s high-profile advocates. In December last year, a tweet from Musk sent Dogecoin’s <a href="https://www.bloomberg.com/news/articles/2021-01-29/retail-wave-spurs-sevenfold-surge-in-dogecoin-into-crypto-top-10">price soaring</a>. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1340590280848908288"}"></div></p>
<h2>Collectivism leads to creativity</h2>
<p><a href="https://www.reddit.com/r/dogecoin/">Reddit threads</a> proclaim Dogecoin’s value as a new global currency. Musk himself shared a similar sentiment a few days ago. Speaking <a href="https://www.newsweek.com/elon-musk-dogecoin-meme-jokes-supporter-bitcoin-cryptocurrency-clubhouse-1565797">on the app Clubhouse</a>, he said:</p>
<blockquote>
<p>Dogecoin was made as a joke to make fun of cryptocurrencies, but fate loves irony. The most ironic outcome would be that Dogecoin becomes the currency of Earth in the future.</p>
</blockquote>
<p>But Dogecoin is best thought of as a cultural product, rather than a financial asset. The reality is few cryptocurrency users hold it as a serious investment or to use in regular transactions. Instead, to own Dogecoin is to participate in a culture. </p>
<p>People buy it because it’s fun to have, is inherently amusing and comes with a welcoming and enjoyable community experience.</p>
<p>If we start thinking of the cryptocurrency as a cultural product, last week’s sudden jump in Dogecoin’s price makes sense. The boost came just after a meme-centric community <a href="https://theconversation.com/gamestop-how-redditors-played-hedge-funds-for-billions-and-what-might-come-next-154076">managed to drive</a> the share price of videogame retailer GameStop from US$20 to US$350 in mere days. </p>
<p>This swarm behaviour was unlike anything seen before — and it frightened global financial markets. </p>
<p>One particularly interesting aspect of the Reddit forum <a href="https://www.reddit.com/r/wallstreetbets/">r/WallStreetBets</a> — which coordinated the attack on the hedge fund that had effectively bet on GameStop’s share price falling — was how many users were having fun.</p>
<p>It’s no surprise activity surrounding Dogecoin has a similar vibe; it was designed to be fun right from the start. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/382121/original/file-20210203-13-1t4o4bf.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A Reddit post equating hedge funds to Lord Voldemort" src="https://images.theconversation.com/files/382121/original/file-20210203-13-1t4o4bf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/382121/original/file-20210203-13-1t4o4bf.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=359&fit=crop&dpr=1 600w, https://images.theconversation.com/files/382121/original/file-20210203-13-1t4o4bf.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=359&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/382121/original/file-20210203-13-1t4o4bf.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=359&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/382121/original/file-20210203-13-1t4o4bf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=451&fit=crop&dpr=1 754w, https://images.theconversation.com/files/382121/original/file-20210203-13-1t4o4bf.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=451&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/382121/original/file-20210203-13-1t4o4bf.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=451&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">There’s no shortage of memes and pop culture references on the r/WallStreetBets subreddit.</span>
<span class="attribution"><span class="source">Screenshot/Reddit</span></span>
</figcaption>
</figure>
<h2>Doge: icon of the internet</h2>
<p>Some people participate in financial markets as a form of consumption — meaning for entertainment, leisure and to experience community — just as much as they do for investment.</p>
<p>Cultural assets such as Dogecoin are hard to systematically value when compared to financial assets, a bit like how we don’t have a fundamental theorem for pricing art.</p>
<p>Almost by definition, the demand for a memecoin will fluctuate as wildly as internet culture itself does, turning cultural bubbles into financial bubbles. RMIT professor and crypto-ethnographer Ellie Rennie calls these “<a href="https://ellierennie.medium.com/the-governance-of-degenerates-part-ii-into-the-liquidityborg-463889fc4d82">playful infrastructures</a>”. </p>
<p>By inspecting Dogecoin closely, we can learn a lot about the interplay of technology, culture and economics. </p>
<p>Moreover, cryptocurrencies are extraordinarily diverse. Some are built for small payments or to be resilient holders of value. Others protect financial privacy or act as an internal token to manage smart contracts, supply chains or electricity networks.</p>
<p>Under the hood, Bitcoin and Dogecoin look almost exactly the same. Their code differs in only a few parameters. But their economic functions are almost entirely opposite. </p>
<p>Bitcoin is a kind of “<a href="https://www.businessinsider.com.au/bitcoin-digital-gold-traditional-currency-5-yrs-billionaire-novogratz-2020-10?r=US&IR=T">digital gold</a>” adopted as a secure hedge against political and economic uncertainty. Dogecoin, on the other hand, is a meme people add to their digital wallet because they think it’s funny. </p>
<p>But in an open digital economy, memes move markets.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1354924057825837060"}"></div></p><img src="https://counter.theconversation.com/content/154470/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jason Potts receives funding from the Australian Research Council. </span></em></p><p class="fine-print"><em><span>Chris Berg receives funding from the Australian Research Council. </span></em></p>Despite having no real basis as a financial asset, cryptocurrency Dogecoin recently reached a market cap of more than A$12 billion.Jason Potts, Professor of Economics, RMIT UniversityChris Berg, Senior Research Fellow and Co-Director, RMIT Blockchain Innovation Hub, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1542682021-02-01T19:00:58Z2021-02-01T19:00:58ZLong before GameStop, bucket shops challenged the legitimacy of Wall Street<figure><img src="https://images.theconversation.com/files/381586/original/file-20210201-15-1ay4kpg.png?ixlib=rb-1.1.0&rect=0%2C0%2C1645%2C1049&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">'Watching the tape or watching the wheel - what is the difference morally?', illustration by Will Crawford c.1912
</span> <span class="attribution"><span class="source">Puck Magazine/Library of Congress</span></span></figcaption></figure><p>The <a href="https://theconversation.com/gamestop-how-redditors-played-hedge-funds-for-billions-and-what-might-come-next-154076">gleeful manipulation</a> of GameStop’s share price is not the first time amateur investors have created a legitimacy crisis on Wall Street. </p>
<p>In the late 19th century, so-called “<a href="https://en.wikipedia.org/wiki/Bucket_shop_(stock_market)">bucket shops</a>” allowed the American public to gamble small amounts on the movement of stocks and commodities on the New York and Chicago exchanges. </p>
<p>In most cases, a bucket shop client wouldn’t own the stock they wagered on: the shop acted more like a bookmaker than a broker, with clients betting against the house that a certain stock would rise. </p>
<p>Historian David Hochfelder describes bucket shops as a “<a href="https://www.jstor.org/stable/4486233">shadow market</a>”. For American Studies scholar Peter Knight, they were a “<a href="https://www.google.com.au/books/edition/Reading_the_Market/eu60DAAAQBAJ">financial netherworld</a>”. Some bucket shops were outright <a href="https://www.routledge.com/Card-Sharps-and-Bucket-Shops-Gambling-in-Nineteenth-Century-America/Fabian/p/book/9780415923576">confidence tricks</a>. The house could manipulate the telegraphic feed of stock prices or arrange “wash sales” to tank heavily-favoured stocks.</p>
<p>Nonetheless, bucket shops were immensely popular. </p>
<p><a href="https://www.jstor.org/stable/4486233">By 1889</a>, the volume of shares wagered in bucket shops was seven times larger than the volume of shares traded on the New York Stock Exchange. Bucket shops drew many more Americans — including women — into the thrill-ride of speculation. </p>
<p>In 1892, <a href="https://chroniclingamerica.loc.gov/lccn/sn83030272/1892-02-14/ed-1/seq-18/">The Sun reported</a> on one of Chicago’s women-only bucket shops, filled mostly with: </p>
<blockquote>
<p>elderly maidens and widows, with an occasional married woman who dabbles in stocks without the knowledge of any one but her broker. </p>
</blockquote>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/381600/original/file-20210201-23-1xp07er.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Image of two women exiting a police van past two policemen and a crowd of people watching on the sidewalk." src="https://images.theconversation.com/files/381600/original/file-20210201-23-1xp07er.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/381600/original/file-20210201-23-1xp07er.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=483&fit=crop&dpr=1 600w, https://images.theconversation.com/files/381600/original/file-20210201-23-1xp07er.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=483&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/381600/original/file-20210201-23-1xp07er.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=483&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/381600/original/file-20210201-23-1xp07er.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=606&fit=crop&dpr=1 754w, https://images.theconversation.com/files/381600/original/file-20210201-23-1xp07er.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=606&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/381600/original/file-20210201-23-1xp07er.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=606&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Two women involved in bucket shop raids in Chicago in 1906 exit a police van.</span>
<span class="attribution"><span class="source">Chicago Daily News, Inc/Chicago History Museum</span></span>
</figcaption>
</figure>
<p>This was the beginning of the American middle class’s real and imaginative investment in high finance.</p>
<h2>Between the sanctioned and the shadows</h2>
<p>Bucket shops mimicked the operations of the club-like bastions of American finance. Increasingly backed by big money and arranged in national chains, their interiors were often fitted with plush furniture and seductive technologies such as <a href="https://americanhistory.si.edu/collections/search/object/nmah_703474">stock tickers</a> and telephones.</p>
<p>This mimicry threatened the legitimacy of stock speculation. Glorified gambling dens that resembled legitimate brokerages created a dangerous slippage between the sanctified activities of stock speculators and the shadowy activities of card sharps and confidence men. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/381604/original/file-20210201-21-p1zw77.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Image of a crowd outside the Mallers Building" src="https://images.theconversation.com/files/381604/original/file-20210201-21-p1zw77.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/381604/original/file-20210201-21-p1zw77.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=437&fit=crop&dpr=1 600w, https://images.theconversation.com/files/381604/original/file-20210201-21-p1zw77.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=437&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/381604/original/file-20210201-21-p1zw77.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=437&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/381604/original/file-20210201-21-p1zw77.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=549&fit=crop&dpr=1 754w, https://images.theconversation.com/files/381604/original/file-20210201-21-p1zw77.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=549&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/381604/original/file-20210201-21-p1zw77.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=549&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Crowd outside a bucket shop raid, Chicago 1905.</span>
<span class="attribution"><span class="source">Chicago Daily News, Inc/Chicago History Museum</span></span>
</figcaption>
</figure>
<p>Reddit and Robinhood create similarly dangerous slippages today, forcing the finance industry to distinguish between gamified market manipulation and the <a href="https://newrepublic.com/article/161082/gamestop-saga-shows-casino-capitalism-eating-world">supposedly legitimate</a> activities of hedge funds and short sellers. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/gamestop-wall-street-short-sellers-are-not-villains-but-reddit-traders-should-be-totally-free-to-attack-them-154310">GameStop: Wall Street short sellers are not villains but Reddit traders should be totally free to attack them</a>
</strong>
</em>
</p>
<hr>
<p>Writing on GameStop for the Washington Post, Sebastian Mallaby <a href="https://www.washingtonpost.com/opinions/2021/01/30/good-guys-gamestop-story-its-hedge-funds-short-sellers/">made the distinction</a> between “rational investors” who work to stabilise the market and keep prices realistic and “honest”, and the “crazies” whose frenzied activity creates irrational prices.</p>
<p>We saw similar language used by the finance industry of a century ago, asserting the superior masculine equipoise and rationality of trained financial professionals compared to the “hysteria” of bucket shop amateurs.</p>
<p>The Sun, for instance, suggested amateur women traders become “oblivious to sentiment and careless of personal appearance, and absurdly superstitious”.</p>
<h2>Dangerous allures</h2>
<p>Just as hedge fund researcher <a href="https://www.forbes.com/sites/antoinegara/2021/01/31/how-robinhood-and-an-army-of-reddit-traders-exposed-the-riskiest-market-in-a-century/">Paul Rowady said</a> the “frictionless and highly gamified environments” of the Robinhood app “ignite the basest instincts of human nature”, early 20th century commentators argued amateur traders were vulnerable to the dangerous allure of the <a href="https://americanhistory.si.edu/collections/search/object/nmah_703474">telegraphic stock ticker</a>, which began to replace Wall Street messenger boys in the 1870s. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/381624/original/file-20210201-19-1jscj02.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Stock ticker machine" src="https://images.theconversation.com/files/381624/original/file-20210201-19-1jscj02.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/381624/original/file-20210201-19-1jscj02.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=404&fit=crop&dpr=1 600w, https://images.theconversation.com/files/381624/original/file-20210201-19-1jscj02.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=404&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/381624/original/file-20210201-19-1jscj02.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=404&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/381624/original/file-20210201-19-1jscj02.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=508&fit=crop&dpr=1 754w, https://images.theconversation.com/files/381624/original/file-20210201-19-1jscj02.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=508&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/381624/original/file-20210201-19-1jscj02.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=508&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Stock tickers would receive information about stock movements via telegraph, and print the details onto ticker tape.</span>
<span class="attribution"><span class="source">National Museum of American History</span></span>
</figcaption>
</figure>
<p>Tickers transmitted stock information over telegraph lines, and were available for anyone to purchase. One pro-Wall Street journalist described the ticker as a “<a href="https://hdl.handle.net/2027/mdp.39015074652838?urlappend=%3Bseq=66">narcotic</a>”, while a doctor writing for the Medical Times described the illness of “<a href="https://hdl.handle.net/2027/iau.31858020936278?urlappend=%3Bseq=331">tickeritis</a>”:</p>
<blockquote>
<p>I have long held the theory that the constant ticking of the instruments in the broker’s office throws the majority of traders into a state of self-hypnosis. </p>
</blockquote>
<p>Through trade journals, financial newspapers and guidebooks the finance industry argued professional brokers were immune to the ticker’s allure. </p>
<p>The professional brokers and trained tape readers who interpreted the stock market fluctuations were said to be silent, private, studious and affectless.</p>
<p>“The Tape Reader is like a <a href="https://en.wikipedia.org/wiki/Pullman_(car_or_coach)">Pullman coach</a>,” wrote the pseudonymous Rollo Tape in his <a href="https://www.goodreads.com/book/show/56619735-studies-in-tape-reading">Studies in Tape Reading</a> (1910): </p>
<blockquote>
<p>which travels smoothly and steadily along the roadbed of the tape, acquiring direction and speed from the market engine, and being influenced by nothing whatever.</p>
</blockquote>
<p>The NYSE itself helped to propagate the image of the ticker reader as a rational actor in an efficient marketplace. An official illustrated history published in 1919, <a href="https://thebhc.org/sites/default/files/Ott_0.pdf">writes historian Julia Ott</a>, presented “photographs of empty, tidy trading floors and small groups of neatly attired clerks calmly operating pneumatic tubes, tickers, and telephones”. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/381594/original/file-20210201-23-rfm0pw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Black and white bustling photo of the floor of the New York Stock Exchange," src="https://images.theconversation.com/files/381594/original/file-20210201-23-rfm0pw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/381594/original/file-20210201-23-rfm0pw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=482&fit=crop&dpr=1 600w, https://images.theconversation.com/files/381594/original/file-20210201-23-rfm0pw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=482&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/381594/original/file-20210201-23-rfm0pw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=482&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/381594/original/file-20210201-23-rfm0pw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=605&fit=crop&dpr=1 754w, https://images.theconversation.com/files/381594/original/file-20210201-23-rfm0pw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=605&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/381594/original/file-20210201-23-rfm0pw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=605&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The New York Stock Exchange, secretly shot with a camera hidden in the photographer’s sleeve, 1907.</span>
<span class="attribution"><span class="source">Library of Congress</span></span>
</figcaption>
</figure>
<p>In tandem, the NYSE challenged cultural representations of stock trading as a collective frenzy. </p>
<p>A <a href="https://www.imdb.com/title/tt0004473/">1914 film adaptation</a> of Frank Norris’s <a href="https://archive.org/details/pitastorychicag02norrgoog">The Pit</a> (1903) was threatened with a libel suit for depicting the psychological dissolution of a power-mad commodities dealer in the eponymous pit at the Chicago Board of Trade. </p>
<p>Changes to the film were secured after the legal threat was issued.</p>
<p>Over 100 years ago, the NYSE established a false though rhetorically seductive dichotomy: the gambler, the amateur, the crowd and the hysteric stood in opposition to the professional broker, whose part-mechanical subjectivity is cool, self-regulating and immune to panic.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/gamestop-how-redditors-played-hedge-funds-for-billions-and-what-might-come-next-154076">GameStop: how Redditors played hedge funds for billions (and what might come next)</a>
</strong>
</em>
</p>
<hr>
<p>Today, both sides of the GameStop struggle are likewise invested in mythmaking and false dichotomies: Robinhood vs The Man; the Rational vs the Rabble. </p>
<p>But it is clear that both sides <a href="https://marketsweekly.ghost.io/what-happened-with-gamestop/">are more similar</a> and more entangled than they would care to admit. This poses difficult questions for the finance industry as it tries to shut out the rabble while maintaining the status quo.</p><img src="https://counter.theconversation.com/content/154268/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Robbie Moore does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The gleeful manipulation of GameStop’s share price is not the first time amateur investors have created a legitimacy crisis on Wall Street.Robbie Moore, Lecturer, University of TasmaniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1543622021-02-01T01:33:31Z2021-02-01T01:33:31Z‘Panic-buying’ is the new normal: how supply chains have adapted<p>I live in Perth. Like most people here, on Sunday I was ready for a busy week of getting the kids to school, going to work, visiting the gym and so on. I planned to spend the hot afternoon at the beach.</p>
<p>That changed with the announcement of <a href="https://www.mediastatements.wa.gov.au/Pages/McGowan/2021/01/Western-Australia-enters-five-day-lockdown-from-6pm-tonight.aspx">a five-day lockdown</a>, effective from 6pm, sparked by a security guard at one of Perth’s quarantine hotels testing positive to COVID-19.</p>
<p>The <a href="https://theconversation.com/perths-5-day-circuit-breaker-lockdown-isnt-an-overreaction-to-a-single-case-its-basic-common-sense-154348">lockdown rules are similar</a> to those in other Australian cities in recent months. Shops for essentials such as groceries, medicine and other necessary supplies remain open. West Australian premier Mark McGowan urged people not to “<a href="https://www.news.com.au/world/coronavirus/australia/perth-lockdown-2021-residents-rush-to-supermarkets-after-lockdown-announcement/news-story/3d6996acb25d26ef3fbc08371f176a9a">panic buy</a>”:</p>
<blockquote>
<p>There is no need to rush to the supermarket. There will not be a shortage of toilet paper or other goods. You will be able to go out and shop for essentials over the course of this week. I urge everyone to remain calm and to act responsibly.</p>
</blockquote>
<p>It made no difference. Within the hour, long queues formed outside supermarkets, service stations and other stores. People stood in 35⁰C heat for up to an hour awaiting their turn to strip store shelves of toilet paper and other items. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/a-toilet-paper-run-is-like-a-bank-run-the-economic-fixes-are-about-the-same-133065">A toilet paper run is like a bank run. The economic fixes are about the same</a>
</strong>
</em>
</p>
<hr>
<p>We’ve seen this all before – <a href="https://theconversation.com/desperately-seeking-toilet-paper-pasta-or-hand-sanitiser-some-relief-is-just-weeks-away-133916">nationwide in March</a>, in <a href="https://theconversation.com/dont-panic-again-heres-why-melbournes-supermarket-shortages-will-quickly-pass-142288">Melbourne in July</a>, Adelaide in November, and Sydney in December. </p>
<p>People are nervous, I get it. But the premier is right. There’s no need. The only shortages that will occur are those brought on by this very behaviour.</p>
<p>The good news, however, is that any induced shortages will be short-lived. In fact, by the time you read this, the fuss might be over.</p>
<figure class="align-center ">
<img alt="Waiting to take a COVID-19 test at the Royal Perth Hospital Sunday, afternoon, January 31 2021." src="https://images.theconversation.com/files/381553/original/file-20210201-19594-31y442.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/381553/original/file-20210201-19594-31y442.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/381553/original/file-20210201-19594-31y442.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/381553/original/file-20210201-19594-31y442.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/381553/original/file-20210201-19594-31y442.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/381553/original/file-20210201-19594-31y442.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/381553/original/file-20210201-19594-31y442.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A hot day to queue: waiting to take a COVID-19 test at the Royal Perth Hospital Sunday, afternoon, January 31 2021.</span>
<span class="attribution"><span class="source">Richard Wainwright/AAP</span></span>
</figcaption>
</figure>
<h2>The psychology behind stockpiling</h2>
<p>For some, the news of a lockdown has little to no effect. Their behaviour is guided by a rational response to uncertainty. They watch in dismay the extreme responses of others during stressful times. </p>
<p>For some a lockdown triggers a complex psychological chain reaction, leading to panic buying and hoarding. Particularly for those more prone to feelings of insecurity and anxiety, stocking up on items is a way to feel more in control. The fact there’s no actual need, because supermarkets will be open tomorrow, has little to do with it. The fear of missing out (FOMO) overcomes rationality.</p>
<p>Not all stockpiling behaviour can be explained away as “irrational”, though. As we’ve seen in recent cases such as GameStop’s share price, people also make “rational” calculations about other people’s behaviour, and respond accordingly. </p>
<p>In this case, based on past evidence, it might seem quite sensible to predict some people will “panic buy” and decide the rational response to that irrational behaviour is to get in first. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/stocking-up-to-prepare-for-a-crisis-isnt-panic-buying-its-actually-a-pretty-rational-choice-132437">Stocking up to prepare for a crisis isn't 'panic buying'. It's actually a pretty rational choice</a>
</strong>
</em>
</p>
<hr>
<p>There’s little a political leader (or anyone else) can say that will change this. In fact, official warnings against panic buying might even do more harm than good by drawing attention to its probability.</p>
<h2>Things will work themselves out</h2>
<p>The good news is that any shortages are likely to be very short-lived – even if this lockdown continues beyond its scheduled five days.</p>
<p>Last March, when stockpiling led to <a href="https://theconversation.com/desperately-seeking-toilet-paper-pasta-or-hand-sanitiser-some-relief-is-just-weeks-away-133916">weeks-long shortages </a> of toilet paper, hand sanitiser and grocery staples such as pasta, it was because most of Australia was involved. Business and supply chains primed to run as efficiently as possible with highly predictable demand were taken by surprise. They struggled to compensate. </p>
<p>This time, having now had multiple experiences to hone their preparedness and response, supply chain managers know the drill.</p>
<p>Knowing such lockdowns are now a risk, they’ve added more fat to supply chains. Inventory is not kept at a minimum. Supermarkets are quick to limit the amount customers can buy. In most case shelves stripped today will likely be replenished tomorrow. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/a-toilet-paper-run-is-like-a-bank-run-the-economic-fixes-are-about-the-same-133065">A toilet paper run is like a bank run. The economic fixes are about the same</a>
</strong>
</em>
</p>
<hr>
<p>With a localised event, also – in this case Perth and Western Australia’s southwest – extra stock can be diverted from around the country. There’s no need for suppliers to suddenly ramp up production. The only thing stopping supply returning to normal is the speed of transportation and restocking. </p>
<p>What happened across the nation in March 2020 was like a major accident leading to delays and detour on a supply chain highway. This situation is more like a car with a flat tyre slowing the traffic on a local road. </p>
<h2>What comes next?</h2>
<p>COVID-19 outbreaks – with short, sharp lockdowns in response – look to be part of the “new normal”, until the pandemic is over. </p>
<p>Outbreaks of store stripping also look to be part of the new normal. But so long as we don’t have these outbreaks in multiple states simultaneously, they will pass quickly.</p>
<p>So stay calm and avoid the rush.</p><img src="https://counter.theconversation.com/content/154362/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Flavio Romero Macau is affiliated with the Australasian Supply Chain Institute</span></em></p>Another local lockdown, another outbreak of shoppers stockpiling. Fortunately supply chains are now prepared.Flavio Macau, Associate dean, Edith Cowan UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1543102021-01-29T17:50:17Z2021-01-29T17:50:17ZGameStop: Wall Street short sellers are not villains but Reddit traders should be totally free to attack them<figure><img src="https://images.theconversation.com/files/381405/original/file-20210129-20398-11bkk6c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Let the games continue. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/portland-usa-jan-27-2021-mobile-1903528705">Tada Images</a></span></figcaption></figure><p>In the battle between the army of renegade Reddit retail traders and Wall Street’s hedge funds over unloved stocks like the Texan computer games retail chain GameStop, there has been a serious case of mistaken accusations on both sides. They are both being wrongly accused of manipulating the markets, but they are not. </p>
<p>Let me start with the hedge funds. The reason why they were targeted by the 5 million-plus traders who follow r/WallStreetBets (of which I am one, by the way) is because their strategy of short-selling stocks is seen as damaging. </p>
<p>Hedge funds and institutional traders sell a stock short when they have a negative view about a company. In essence, this involves borrowing the stock in the securities lending market and selling it, with the commitment to return the loaned stock later. </p>
<p>Such a strategy tends to be self-fulfilling: when the stock is sold, it puts downward pressure on the price (especially if many investors do the same). Then, when the time comes to return the borrowed stock, the hedge fund buys it back at a much lower price, thereby pocketing a hefty profit.</p>
<p>In the view of the angry retail traders who have driven up the price of GameStop and other stocks <a href="https://t3n.de/news/nokia-kurs-dreht-durch-stampede-1352566/">like Nokia</a> in recent days, this is manipulation. Their attack, using cheap and easy trading apps like <a href="https://robinhood.com/us/en/">Robinhood</a>, was based on the simple premise that if short sellers make prices go down, buyers make prices go up (assuming they have market power). </p>
<p>If buyers dominate, it creates what is known as a “short squeeze” as prices go up and the short sellers have to rush to buy fast in order to lose as little money as possible. In some cases, the rising prices will trigger “margin calls” by their lenders, which requires the short sellers to immediately cover their costs. This has inflicted billions of dollars of losses on hedge funds like Melvin Capital. </p>
<p>Meanwhile, the rush to buy stocks back pushes prices even higher, and some short sellers are pushed out of the market because the stock is too expensive for them to buy. In such cases, they are usually penalised by the exchange regulator for “failing to deliver” the stock back to the lenders that they borrowed it from. </p>
<h2>In defence of short sellers</h2>
<p>The debate about short sales and their impact on stock markets goes back to the beginning of the 20th century. It was highlighted during the 2008 financial crisis, and I was already among the few that <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.2007.01230.x">advocated for short sales</a> as a way to increase market efficiency, together with my colleagues professors William Goetzmann and Ning Zhu. </p>
<p>However, most saw the fall of Lehman Brothers, AIG and other financial institutions in 2008 as <a href="https://www.wsj.com/articles/SB121868231109839673">caused by short sellers</a> artificially betting on their stocks plummeting. Many jurisdictions, from the US to Japan, implemented short sale restrictions and market halts. </p>
<p>In some European markets, it has actually been quite common for the market authorities to prohibit short sales for certain periods. Remember: regulators want stock prices to go up, not down. The extreme case is the Pakistani regulator, which in 2008 <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2330765">imposed a regulation</a> that basically prohibited selling (not short selling but <em>any</em> selling).</p>
<h2>In defence of renegade traders</h2>
<p>As for the Reddit traders, Robinhood and certain other platforms suspended buying (but not selling) of targeted stocks like GameStop in the midst of the excitement. This earned them much vilification on social media, and one trader <a href="https://edition.cnn.com/2021/01/28/investing/lawsuit-robinhood-gamestop-wallstreetbets/index.html">filed a lawsuit</a> against Robinhood.</p>
<p>Shares in GameStop and other stocks quickly tumbled, but they rose again a few hours later when the platform signalled that the suspension would be temporary. Robinhood <a href="https://www.ft.com/content/9a1b24e6-0433-462a-a860-c2504ea565e4">explained soon after</a> that it had taken this “tough decision” to ensure that it could meet its capital obligations with US regulator the SEC. </p>
<p>It could presumably have breached these requirements if the prices of stocks had suddenly fallen because so many traders would have borrowed heavily to maximise what they could buy, and Robinhood would have had to pick up the tab if they couldn’t pay. </p>
<p>The platform <a href="https://www.ft.com/content/6777351d-d6c3-3be1-b10d-0635ca0540e6">quickly raised</a> an additional US$1 billion from its backers to cover such eventualities, and then reopened trading a few hours later. The prices of the targeted stocks then shot up again, though it soon emerged that there were still <a href="https://www.ft.com/content/c5a85213-ca41-438d-9087-ff78791eabff">heavy restrictions</a> on how many shares traders could buy in GameStop and certain other companies. </p>
<p>Now the controversy is whether regulators should go after Robinhood on the basis that it has been facilitating stock manipulation. In my view, the retail traders are no more manipulators than the short sellers. Manipulation requires both false information and intent to profit. Neither side falls into this category. </p>
<p>Markets are to finance what democracy is to our political systems: we need to allow people to vote according with their preferences and information. In the case of GameStop, it is equally as acceptable that sophisticated investors use market mechanisms to benefit from pessimistic beliefs, and that uninformed, well organised investors push stock prices up in order to harm the Wall Street institutions. </p>
<p>It should be the role of market regulators to increase transparency of markets so that trading is not driven by misinformation. They should also educate potential investors about the risks involved in equity trading (in fact, the potential losses for Reddit members in the GameStop episode could yet end up being enormous). </p>
<p>Finally, it is a regulator’s responsibility to facilitate market entry to all, whether they are sophisticated or uninformed, whether they are rich or poor, whether they are tall or short. Markets are an amazing invention of humankind, but they are risky.</p><img src="https://counter.theconversation.com/content/154310/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Arturo Bris follows r/WallStreetBets.</span></em></p>There was outrage after Robinhood and other trading apps temporarily suspended buying of the stocks being targeted by the Reddit traders.Arturo Bris, Professor of Finance, International Institute for Management Development (IMD)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1542842021-01-29T14:29:14Z2021-01-29T14:29:14ZGameStop: hedge fund attacks have opened up powerful new front against Wall Street<figure><img src="https://images.theconversation.com/files/381360/original/file-20210129-21-18iwj6c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Wall Street under attack. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/new-york-city-ny-oct-11-240264190">Javen</a></span></figcaption></figure><p>In the dying days of 2009, Rage Against the Machine <a href="https://www.rollingstone.com/music/music-news/rage-against-the-machine-win-u-k-christmas-single-battle-187249/">achieved the</a> unlikeliest of Christmas number ones with a re-release of their anti-establishment anthem Killing in the Name. This was driven by an online campaign to give a great festive bloody nose to Simon Cowell, whose latest X-Factor winner was denied their routine annual spot at the top of the charts. </p>
<p><a href="https://journals.equinoxpub.com/PMH/article/view/14455">That protest</a> against a creatively bankrupt mainstream pop media became a case study in the power of an online crowd with a strong narrative. It finds echoes today in a very different arena: the current attack on Wall Street hedge funds by retail traders via the Reddit forum r/WallStreetBets. </p>
<p>When exchanges opened in the New Year, shares in GameStop, a Texas-based chain of computer games stores, were swapping hands at US$19 (£14) each. By the close on Tuesday January 26 they were worth US$347 – an increase of over 1,700%. </p>
<p><strong>GameStop price action</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/381357/original/file-20210129-23-1clw92k.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="The GameStop share price chart" src="https://images.theconversation.com/files/381357/original/file-20210129-23-1clw92k.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/381357/original/file-20210129-23-1clw92k.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=327&fit=crop&dpr=1 600w, https://images.theconversation.com/files/381357/original/file-20210129-23-1clw92k.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=327&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/381357/original/file-20210129-23-1clw92k.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=327&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/381357/original/file-20210129-23-1clw92k.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=411&fit=crop&dpr=1 754w, https://images.theconversation.com/files/381357/original/file-20210129-23-1clw92k.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=411&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/381357/original/file-20210129-23-1clw92k.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=411&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://uk.tradingview.com/chart/?symbol=NYSE%3AGME">TradingView</a></span>
</figcaption>
</figure>
<p>Driven by a David v Goliath <a href="https://www.theguardian.com/commentisfree/2021/jan/28/anarchy-in-jokes-and-trolling-the-gamestop-fiasco-is-4chan-think-in-action">narrative of revenge</a> against previously untouchable Wall Street <a href="https://www.marketwatch.com/story/reddit-moderator-slams-wall-street-fat-cats-as-gamestop-surge-continues-they-hate-that-you-played-by-the-rules-and-still-won-11611600048">“fat cats”</a>, the surge was coordinated by the <a href="https://www.reddit.com/r/wallstreetbets/">almost 5 million members</a> of WallStreetBets, using apps like Robinhood that allow anyone to trade financial securities and derivatives for little or zero commission fees. <a href="https://www.reddit.com/r/wallstreetbets/comments/l7ly4a/people_are_risking_their_lives_to_wage_war/">In the words</a> of one of these traders: </p>
<blockquote>
<p>People are risking their lives to wage war against the suits and it brings tears to my eyes to watch them do it.</p>
</blockquote>
<h2>Beaten at their own game</h2>
<p>This produced <a href="https://www.bloomberg.com/news/articles/2021-01-25/gamestop-short-sellers-reload-bearish-bets-after-6-billion-loss">an estimated US$6 billion</a> in stinging losses for hedge funds and activists “short selling” GameStop shares. <a href="https://theconversation.com/why-gamestop-shares-stopped-trading-5-questions-answered-154255">Short selling</a> is a bet on stock prices going down, and is done by borrowing shares, selling them, and then buying them back later to return to the lender – hopefully at a reduced price. </p>
<p>Critics argue that hedge funds that engage in short selling have an incentive to push down prices in questionable ways, such as spreading negative rumours about the company’s future. The practice was <a href="https://www.ft.com/content/f59fdd00-93b0-11dd-9a63-0000779fd18c">blamed to some extent</a> for major financial institutions going into freefall during the global financial crisis in 2008. </p>
<p>By buying GameStop to hurt those with short positions, retail investors employed a classic Wall Street tactic that hedge funds use against one another. Buying enough shares to cause the price to surge forces short-selling hedge funds to buy back the borrowed shares at a higher price to cover their positions, which in turn pushes the price higher. In Wall Street parlance, it’s the “<a href="https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/short-squeeze/">short squeeze</a>”.</p>
<p>Hedge funds like Melvin Capital had to swallow soaring losses as the share price hit certain levels and triggered “margin calls” where they had to immediately repay their lenders. Melvin only survived thanks to a <a href="https://www.bloomberg.com/news/articles/2021-01-25/citadel-point72-to-invest-275-billion-in-melvin-capital">cash injection</a> of US$2.8 billion from other hedge-fund backers. </p>
<p>In previous years, such an attack would have been quickly swept aside by the larger firepower of hedge funds and established Wall Street institutions. Activist short sellers also kept the lid on things by publishing damning research on targeted firms. <a href="https://www.tandfonline.com/doi/abs/10.1080/1351847X.2017.1288647">Our study from 2017</a> demonstrated that a short-seller thesis can almost instantaneously affect online message board sentiment and send investors fleeing. </p>
<p>The difference now is retail investors’ much better access to the financial markets, swelling their numbers and their ability to collectively move prices. <a href="https://www.businessofapps.com/data/robinhood-statistics/">The number of users</a> on Robinhood has increased from 500,000 in 2014 to 13 million in 2020, and <a href="https://www.cnbc.com/2020/05/21/many-americans-used-part-of-their-coronavirus-stimulus-check-to-trade-stocks.html">trading stocks is</a> the most common use for the US government pandemic stimulus cheques in almost every age bracket. </p>
<h2>The empire strikes back</h2>
<p>Robinhood and other trading platforms <a href="https://techcrunch.com/2021/01/28/robinhood-users-say-its-restricting-trades-after-the-gamestop-brouhaha-shakes-markets/?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAKVZoI-2xGukI5bpebZ1sL5B_FiIUxeOfT093ha7bDkyXigvWCgZFHvsERADuQ8cc7S4QJ304tzjWBI63Q1DfRzGaAJ9Rv-pfMNmE7dKWO6kXdJX1lhPnTpZsWtZGG2XPt9IgkC8AWX1InzghEYhXbGNEYDwoXXOjBL19Tdv8oh4">banned trading in GameStop shares</a> around the time they peaked, sparking outrage at a perceived “rigged” game tilted towards the big players. Both <a href="https://twitter.com/tedcruz/status/1354833603943931905">Democratic and Republican senators have condemned</a> this decision to block retail investors while hedge funds can continue to trade. The platforms <a href="https://www.ft.com/content/9a1b24e6-0433-462a-a860-c2504ea565e4">claim they had to</a> impose temporary suspensions to protect their own financial positions from the risk of targeted stocks tumbling and retail traders who have borrowed to maximise their buying power suddenly racking up losses they can’t afford to cover. </p>
<p>The debate over how regulators should respond to this conflict is meanwhile intensifying, raising the prospect of new rules that discriminate against retail investors. That could fatally undermine trust in the regulators, since they would effectively be saying it’s alright for Wall Street to employ short squeezes but not the little guys. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/381358/original/file-20210129-21-1a6nqdr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="WallStreetBets on Reddit on a smartphone" src="https://images.theconversation.com/files/381358/original/file-20210129-21-1a6nqdr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/381358/original/file-20210129-21-1a6nqdr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/381358/original/file-20210129-21-1a6nqdr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/381358/original/file-20210129-21-1a6nqdr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/381358/original/file-20210129-21-1a6nqdr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/381358/original/file-20210129-21-1a6nqdr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/381358/original/file-20210129-21-1a6nqdr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">You betcha.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/wallstreetbets-reddit-group-seen-on-smartphone-1904689579">mundissima</a></span>
</figcaption>
</figure>
<p>Either way, these events have brought issues to the fore that regulators would have needed to address further down the road anyway, since the trading game has clearly changed in the last couple of years. For example, one new danger is an unfriendly foreign country feeding “fake news” into social media to enrage retail investors about perceived unfairnesses, which galvanises them into attacks that prevent the markets from working efficiently. </p>
<p>After all, some would argue that short sellers are unfairly portrayed as villains in this David v Goliath battle. <a href="https://www.sciencedirect.com/science/article/pii/S0304405X01000563?casa_token=u4L2JAt7vZoAAAAA:eCkMlssnABzzZ14XO98rEdW2XQNpll_IN0SURLvhRw2S2amdPR5ougSaq_Z2K8_bcKn98wfx">They help</a> to <a href="https://www.economist.com/leaders/2020/06/24/wirecards-scandal-shows-the-benefits-of-short-sellers">keep markets liquid</a> by making share purchases easier for those who do want to buy a particular stock, and they can put a spotlight on companies that are <a href="https://academic.oup.com/rfs/article-abstract/28/6/1701/1610243">poorly managed</a>, <a href="https://repositories.lib.utexas.edu/handle/2152/74990">dishonest</a>, or <a href="https://journals.sagepub.com/doi/full/10.1177/0148558X17748524?casa_token=ccIf5rD3WD4AAAAA%3AcfVd7JdLyEBBTcoxNQk1ayEKZkU-qZoMoxcmmamMbH3rwIwXiNxKSsqXrMLNSil4XzAWTzpWaPU">engaged in poor corporate governance</a>.</p>
<p>As a <a href="https://www.nytimes.com/2017/06/08/magazine/the-bounty-hunter-of-wall-street.html">New York Times profile</a> of notorious short-seller Andrew Left states, “In a town with a dozing sheriff, vigilantes become the agents of order.” Left’s fund, Citron Capital, <a href="https://markets.businessinsider.com/news/stocks/citron-gamestop-reddit-short-position-covered-loss-reddit-andrew-left-2021-1-1030009872">made a 100% loss</a> on its short position in GameStop. </p>
<p>So how should the regulators play this? They may not want to curb investor discussion in online communities, even if it were possible, or try and set parameters about constitutes “manipulation” and “honest discussion” of a particular stock. One option might be to increase their monitoring capacity, perhaps through some kind of early-warning system based on the volume of online chatter and the sentiment being expressed. They could feed this information to the trading platforms to let them take a view on temporarily limiting trading on those securities. </p>
<h2>I won’t do what you tell me …</h2>
<p>Nobody knows how the present situation will end. The intense activity by retail investors could prompt a wider sell-off by forcing hedge funds with short positions to sell other shares to raise the cash to cover their losses. This could hurt companies and investors that were only spectators in this battle, with potentially far-reaching consequences. </p>
<p>For those worried about the potential for chaos, Rage Against the Machine might offer a crumb of comfort. Since that Christmas number one, numerous attempts to achieve a similar feat have been less successful. The collective action was diluted by the sheer number of copycat campaigns. </p>
<p>Similarly, we have seen campaigns by traders launched against Blackberry and AMC Entertainment, and there are rumours of a similar strategy being employed against American Airlines. Whether they reach similar levels as GameStop remains to be seen. </p>
<p>Either way the crowd will regroup, and regulators will need to learn valuable lessons from this episode. Having shown what a crowd of renegade investors can achieve, this could well have opened up a powerful new front in anti Wall Street activism.</p><img src="https://counter.theconversation.com/content/154284/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The question is if and how the regulators can respond.James Bowden, Lecturer in Financial Technology, University of Strathclyde Edward Thomas Jones, Lecturer in Economics, Bangor UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1542552021-01-29T02:18:33Z2021-01-29T02:18:33ZWhy GameStop shares stopped trading: 5 questions answered<figure><img src="https://images.theconversation.com/files/381248/original/file-20210129-23-9r03rc.jpg?ixlib=rb-1.1.0&rect=7%2C0%2C4779%2C2928&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">GameStop shares soared after some retail investors teamed up to jack up the price.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/GameStopStockSurge/e8c6707c9a4846b48b7db2034e05258f/photo?Query=gamestop%20AND%20stock&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=19&currentItemNo=8">AP Photo/John Minchillo</a></span></figcaption></figure><p><em>Editor’s note: <a href="https://www.bloomberg.com/news/articles/2021-01-29/day-trader-favorites-rally-back-as-robinhood-eases-trading-ban?srnd=premium&sref=Hjm5biAW">GameStop stock resumed its dramatic ascent</a> after a popular no-fee online broker said it would lift restrictions on trading its shares. In recent days, frenzied activity in the video game retailer’s stock led the New York Stock Exchange to <a href="https://www.nyse.com/trade-halt-curren">briefly halt trading multiple times</a>, while <a href="https://www.cbsnews.com/news/robinhood-block-trading-of-gamestop-stock">Robinhood and other brokers</a> restricted purchases of GameStop. That <a href="https://www.marketwatch.com/story/mark-cuban-dave-portnoy-aoc-and-others-react-to-robinhood-restricting-trades-on-gamestop-and-amc-11611855658">prompted outrage</a> among some lawmakers and investors, leading to calls for investigations in Washington. <a href="https://scholar.google.com/citations?user=y_ViJ7oAAAAJ&hl=en&oi=ao">Jena Martin</a>, a law professor who studies securities regulation, explains what’s going on, why trading is sometimes restricted and how to tell if it’s a sign of any funny business.</em></p>
<h2>1. What prompts trading in a stock to be halted?</h2>
<p>Typically, there are two reasons that an exchange <a href="https://www.finra.org/investors/alerts/when-trading-stops-what-you-need-know-about-halts-suspensions-and-other-interruptions">might stop trading in a stock</a>. The first occurs when an exchange – often at a company’s request – halts trading in that stock for a big announcement, such as a merger or a product recall. This gives investors time to absorb the news before trading resumes. </p>
<p>A second reason is when trading in a stock becomes exceptionally volatile – that is, it moves higher or lower quickly and unpredictably, especially when there is no news coming from the company that would explain the change. This halt usually happens automatically, such as if a stock jumps or plunges by a certain percentage within five minutes. That’s why shares of the Grapevine, Texas-based company GameStop <a href="https://www.marketwatch.com/story/gamestop-amc-halted-after-a-minute-of-trading-as-shares-retreat-from-massive-gains-11611844823">stopped trading several times</a> on Jan. 27 and 28, but the halts lasted only a few minutes at a time. </p>
<p>The more controversial issue <a href="https://www.cnbc.com/2021/01/28/robinhood-interactive-brokers-restrict-trading-in-gamestop-s.html">came after several brokers</a>, including Robinhood, Ameritrade and Charles Schwab, restricted trading of GameStop and a few other stocks on their platforms, whether by halting trading entirely or <a href="https://www.businesswire.com/news/home/20210129005408/en/Schwab-Issues-Statement-About-Recent-Trading-Activity">imposing more stringent margin requirements</a>. They said they had to do this to <a href="https://www.bloomberg.com/news/articles/2021-01-28/robinhood-is-said-to-draw-on-credit-lines-from-banks-amid-tumult?srnd=premium&sref=Hjm5biAW">reduce their risk</a>. Brokerages are required by the Securities and Exchange Commission to have enough cash on hand to cover a certain percentage of trades on their platform. When stock volatility is high, it drives up how much capital they need. </p>
<h2>2. How common are these types of trade restrictions?</h2>
<p>Trading halts by stock exchanges happen <a href="https://www.finra.org/investors/alerts/when-trading-stops-what-you-need-know-about-halts-suspensions-and-other-interruptions">fairly regularly</a>, but they’re rarely a big deal. The last time a NYSE trading halt of a specific stock garnered this much attention came when <a href="https://www.reuters.com/article/sppage012-n17385634-oisbn/nyse-suspends-trading-in-lehman-brothers-shares-idUSN1738563420080917">Lehman Brothers</a> went bankrupt in 2008. </p>
<p>It’s very rare, however, for brokers to suspend trading in a specific stock. I can’t remember that ever happening, and I’ve been closely following the market for 20 years – including five at the SEC. </p>
<h2>3. Does a halt in trading mean something fishy is going on?</h2>
<p>Sometimes. </p>
<p>Extreme volatility in a stock is seen as a sign of suspicious activity in the market, and may trigger an SEC investigation. </p>
<p>In the case of GameStop, the saga started when a band of retail investors on the <a href="https://www.reddit.com/r/wallstreetbets/">WallStreetBets Reddit forum</a> decided to gang up on the institutional investors they see as having too much power over the market. They noticed that hedge funds and other professional traders were betting that shares of GameStop would go down – known as shorting a stock – and so they teamed up to drive its share price higher. <a href="https://www.theguardian.com/business/2021/jan/28/sending-a-message-gamestop-investors-on-why-they-bought-shares">This “short squeeze”</a> helped drive GameStop’s share price <a href="https://finance.yahoo.com/quote/GME/">up as much as 2,000% in a matter of weeks</a>, causing some professional investors to lose <a href="https://markets.businessinsider.com/news/stocks/gamestop-short-sellers-squeezed-losses-reddit-traders-army-cohen-palihapitiya-2021-1-1030006226">billions of dollars</a>. </p>
<p>This type of trading – both the shorting and the squeezing – is often known as speculation, because it has nothing to do with the fundamental value of a company. Speculation is legal – <a href="https://www.marketwatch.com/story/how-you-could-lose-everything-by-short-selling-stocks-whether-its-betting-against-gamestop-or-tesla-2021-01-26">although very risky</a> – but it can cross the line into illegal behavior if there’s evidence of actual market manipulation. </p>
<h2>4. All right then, what’s market manipulation?</h2>
<p>According to the <a href="https://www.law.cornell.edu/uscode/text/15/78i">laws that govern the stock market</a>, market manipulation happens when someone tries to create excitement and activity in a particular stock specifically to entice people to buy that stock and drive up the price.</p>
<p>If those same initial investors then sell the stock at the heightened price, regulators get suspicious. They become concerned that said investors were just trying to create a frenzy in the market to artificially inflate the value of the stock so they can sell it at its new high price. The SEC <a href="https://www.sec.gov/news/press/2011/2011-214.htm">accused a unit of Citigroup</a> of doing this during the financial crisis when it hyped the price of a financial product tied to the housing market in an effort to unload it at an inflated price. </p>
<p>This is known as a “<a href="https://www.investor.gov/introduction-investing/investing-basics/glossary/pump-and-dump-schemes">pump-and-dump</a>” scheme, and some allege <a href="https://www.cnbc.com/2021/01/28/gamestop-now-called-a-pump-and-dump-scheme-what-you-need-to-know.html">this is exactly what the Redditor investors were doing</a>. </p>
<p>[<em>Insight, in your inbox each day.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=insight">You can get it with The Conversation’s email newsletter</a>.]</p>
<p>We don’t know yet if the SEC is looking into whether that’s what’s happening here, though the regulator has indicated it’s “<a href="https://finance.yahoo.com/news/yellen-monitoring-gamestop-market-activity-183420988.html">monitoring” the situation closely</a>. The SEC, as the primary regulator of the stock market, is responsible for enforcing securities laws. </p>
<p>To determine whether GameStop investors were involved in a pump-and-dump scheme, SEC investigators would check into their trading activity and collect other evidence to try to figure whether these investors were “<a href="https://www.law.cornell.edu/uscode/text/15/78i">trying to create a false or misleading appearance of active trading</a>.” In addition, any evidence that individuals had made false statements to help drive the stock price up <a href="https://www.fbi.gov/stats-services/publications/securities-fraud">would be considered fraud</a>. This would be particularly damning. </p>
<h2>5. What’s next?</h2>
<p>Robinhood and a few other brokers said <a href="https://www.nytimes.com/2021/01/28/business/robinhood-gamestop-restrictions.html">they will resume allowing “limited” buying</a> of GameStop after lawmakers including U.S. Rep. Alexandria Ocasio-Cortez and Sen. Ted Cruz <a href="https://www.cnbc.com/2021/01/28/gamestop-cruz-ocasio-cortez-blast-robinhood-over-trade-freeze.html">attacked them</a> for restricting trades. </p>
<p>U.S. Rep. Maxine Waters and Sen. Sherrod Brown <a href="https://techcrunch.com/2021/01/28/gamestop-hearings-congress-waters-robinhood/">announced hearings</a> into the stock market turmoil and the “predatory” conduct of hedge funds.</p>
<p>But some officials – such as the <a href="https://www.cnbc.com/2021/01/27/gamestop-speculation-is-danger-to-whole-market-massachusetts-regulator.html">top securities regulator in Massachusetts</a> – are worried the frenzied trading in GameStop represents a broader risk to the U.S. equities market and are urging the SEC to step in and halt trading for as long as a month. The SEC does have the power to halt trading, but that is a nuclear option that the SEC uses only if it’s concerned about issues within the company itself. Were it to do that, it would be pretty clear <a href="https://www.nytimes.com/2002/03/19/business/sec-forces-new-york-stock-exchange-to-end-trading-of-a-company.html">it thinks some funny business</a> is going on.</p><img src="https://counter.theconversation.com/content/154255/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jena Martin does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The easy answer as to why trading was halted relates to the stock’s ‘volatility’ after its dramatic climb in recent weeks. But it could also mean something fishy is going on.Jena Martin, Professor of Law, West Virginia UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1540762021-01-28T22:37:52Z2021-01-28T22:37:52ZGameStop: how Redditors played hedge funds for billions (and what might come next)<p>How does a small retail company that sells video games, worth less than US$400 million in the middle of 2020, become a US$10 billion company in less than six months? How does its share price climb from about US$20 on January 12 2021 to US$347 on January 27 – then fall back to US$193 the very next day? </p>
<p>The stunning price surge in <a href="https://finance.yahoo.com/quote/GME/chart/">GameStop shares</a>, driven largely by <a href="https://www.nytimes.com/2021/01/27/business/gamestop-wall-street-bets.html">hyped-up Reddit users</a> with the aid of <a href="https://twitter.com/elonmusk/status/1354174279894642703">Elon Musk</a>, has drawn the <a href="https://www.marketwatch.com/story/biden-administration-monitoring-the-situation-with-gamestops-stock-white-house-says-2021-01-27">attention of the US government</a>, led to <a href="https://www.nbcnews.com/business/markets/social-media-driven-trading-frenzy-gamestop-amc-entertainment-sparks-calls-n1255830">calls for regulation</a> from the head of the NASDAQ exchange, and even driven up the shares of an Australian mining company with a <a href="https://www.theage.com.au/business/companies/stunned-gamestop-trading-frenzy-causes-local-mining-company-shares-to-soar-20210128-p56xh4.html">coincidentally similar sharemarket code</a>. </p>
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<p>How is this happening? The simple answer is it’s a power play, magnified by social media, between small retail investors who want some share prices to rise and larger hedge funds who have made big bets that those same prices will fall. </p>
<h2>Revenge of the little fish</h2>
<p><a href="http://melvincapital.com/">Melvin Capital</a> is a hedge fund (worth US$12.5 billion until recently) with a “short position” on <a href="https://www.gamestop.com">GameStop</a>. A short position means Melvin was betting GameStop’s share price would fall (a reasonable bet, as the outlook for bricks-and-mortar video game stores is a bit like what happened to Blockbuster and other video rental outlets). This in itself is not at all unusual.</p>
<p>What made the past two weeks so unique was the heavy involvement of small individual investors in driving the action. Through platforms like Reddit (specifically the <a href="https://www.reddit.com/r/wallstreetbets/">Wall Street Bets</a> forum, which describes itself as “like 4Chan found a Bloomberg terminal”), these retail investors have worked to together to drive prices so high that hedge funds have had to abandon their short positions. </p>
<p>As a result, the short sellers have lost a lot of money and the retail investors (and anybody else with GameStop shares) have made huge profits. Normally on the stock market, the shark swallows the little fish. Now the little fish are eating the shark. </p>
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Read more:
<a href="https://theconversation.com/explainer-what-is-short-selling-9337">Explainer: what is short selling?</a>
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<p>These individual investors started buying shares (and options to buy shares in the future) in GameStop, and <a href="https://www.nasdaq.com/articles/its-not-just-amc-and-gamestop-these-4-reits-are-being-short-squeezed-too-2021-01-27">other companies</a> that had significant short positions. In fact, the 50 most shorted companies on the <a href="https://en.wikipedia.org/wiki/Russell_3000_Index">Russell 3000 index</a> have <a href="https://www.bloomberg.com/news/articles/2021-01-26/short-sellers-crushed-like-never-before-as-retail-army-charges">gone up 33% this year</a>.</p>
<p>This increase has become a surge in recent days. GameStop <a href="https://finance.yahoo.com/quote/GME/chart/?guccounter=1#">surged in value</a> by 92% on January 26 (US time), leapt another 134% on January 27, and has traded more than 178 million shares. The average volume typically traded for GameStop is roughly 10 million shares per day. This is not normal.</p>
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<h2>How long can redditors remain irrational?</h2>
<p>How is it possible that small retail investors can drive the value of a company up like this? </p>
<p>Two important factors have led to the situation. The first is structural. Investors seized on the fact that Melvin, and another fund called Citron Capital, had significant short positions in GameStop. </p>
<p>When a stock price surges, short sellers must either put in more money to sustain their position or liquidate it. Melvin tried to sustain its short position, because the hedge fund’s managers believe the stock is overvalued, and has suffered massive losses as a result (last week, Melvin announced it was already down 30% on the year). This is a case of the well-known idea that “the market can remain irrational longer than you can remain solvent”. </p>
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<p>Melvin may ultimately be right, and GameStop’s price will eventually fall, but retail investors who knew about Melvin’s bet forced it into an untenable position. With the price continually pushed up, Melvin was left with a stark choice: continue to go short, or else realise its losses. </p>
<h2>How buying creates more buying</h2>
<p>This leads to the second factor, which is mechanical. The retail investors driving the price surge are much smaller than the hedge funds they are battling. By buying the stock and call options (which are effectively rights to buy the stock in future at a certain price), retail investors are causing market makers to also buy shares in GameStop. </p>
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Read more:
<a href="https://theconversation.com/gambling-on-the-stock-market-are-retail-investors-even-playing-to-win-143248">Gambling on the stock market: are retail investors even playing to win?</a>
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<p>Market makers are companies that facilitate share trades by owning stocks and making them available for sale. Market makers don’t care about whether stock prices rise or fall; they just want a cut when people buy or sell. </p>
<p>So when an investor buys a call option from a market maker, the market maker will immediately hedge the position by buying the stock. This way, they are covered whether the price rises or falls.</p>
<p>If there is a big enough surge in speculators buying call options, as we have seen with GameStop, it will be accompanied by a lot of stock buying. </p>
<p>This is a cascading effect, which leads to price runs. In this case, it’s running the price up, but we are just as likely to see the same effect running the price down as well. (This is what happened on a larger scale on October 19, 1987, triggering the <a href="https://en.wikipedia.org/wiki/Black_Monday_(1987)">Black Monday stock market crash</a>.)</p>
<h2>After the surge</h2>
<p>These two factors – short sellers getting squeezed and market makers hedging their bets – have led to this situation. You need both for what we are witnessing: an investor with an exposed position (Melvin) and a flurry of investors targeting that position (Redditors and others).</p>
<p>Soon this will be all over. Late on January 27 (US time), Melvin Capital <a href="https://www.cnbc.com/2021/01/27/hedge-fund-targeted-by-reddit-board-melvin-capital-closed-out-of-gamestop-short-position-tuesday.html">announced</a> it had abandoned its short position. It’s unclear how much money Melvin lost, but it has <a href="https://www.wsj.com/articles/citadel-point72-to-invest-2-75-billion-into-melvin-capital-management-11611604340">taken on almost US$3 billion</a> in investment from the Citadel and Point72 funds to cover its losses.</p>
<p>The next morning, GameStop’s price actually <a href="https://www.bloomberg.com/news/articles/2021-01-28/gamestop-resumes-rally-after-reddit-forum-s-brief-outage"><em>continued to rise</em></a>, reaching almost US$500 for a brief moment. However, at that point several popular retail stockbrokers – including Robinhood, Interactive Brokers and E*Trade – intervened to limit trading in several highly active stocks including GameStop. The price quickly plummeted before rallying and ending the day at $US193.60.</p>
<p>What’s next? With the short sellers removed from the game, the reality of the company’s business prospects may reassert themselves. </p>
<p>The past two weeks have been exciting times for market watchers. But we cannot ignore the apparent ease with which these stocks have been manipulated, and the possibility of more market manipulation in the future. </p>
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Read more:
<a href="https://theconversation.com/the-sandp-500-nears-its-all-time-high-heres-why-stock-markets-are-defying-economic-reality-142707">The S&P 500 nears its all-time high. Here's why stock markets are defying economic reality</a>
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<p class="fine-print"><em><span>James Doran does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A small band of Reddit users have driven GameStop shares to incredible highs at the expense of multi-billion-dollar hedge funds.James Doran, Associate professor/Deputy head of school, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.