In early 2021, what had been a lockdown hobby for some suddenly became a phenomenon of global relevance. Throughout 2020, more people took up retail investing through apps like Robinhood and online forums such as the subreddit r/WallStreetBets. This culminated in AMC Entertainment and GameStop’s short squeeze, which caused major financial consequences for certain hedge funds and large losses for short sellers.
The phenomenon caught the attention of the public, spurring discussions about market regulation, the challenges of online moderation and the real-world influence of internet platforms. One year on, we take a look at how things have changed.
Today, r/WallStreetBets users continue to analyse the stock markets and identify viable shorting targets for individual investors. With the recent precipitous crash of Peloton shares following the disclosure of its expected revenue fall, its CEO stepping down, and the reported layoffs of 20% of its workforce, the company quickly became one of the top 10 stocks discussed on the platform. Even GameStop, one of the original subjects of the meme stocks narrative, is still actively discussed by the subreddit’s members, as they try to predict how the stock will behave in the future.
The importance of the digital world’s opinion about individual stocks and the narratives concerning companies’ expected value is still a factor that cannot be overlooked. Companies are monitoring the conversations and trying to appeal to individual investors as well as institutions, by following the ever-evolving online discussions, and tracking the relevant “cashtags” on Twitter (where users include a dollar sign next to a company or cryptocurrency’s stock ticker symbol). Last year, corporate investors even tried to become active participants in the online discourse, as they looked to recruit Reddit experts with a specific track record on the forums.
The complexities of stock sentiment analysis
One challenge posed by online forums such as r/WallStreetBets is that the specific language used by its subculture is not readily accessible to institutional investors trying to access and analyse its discussions. The process of understanding the community’s sentiment towards a specific stock, and predicting organised short squeezes such as GameStop, is hindered by communicative barriers.
Service providers have attempted to automate sentiment analysis, but the human, individual aspect at the core of these discussions, with the subculture’s unique and ever-evolving jargon, creates complexities. Algorithms fail to capture the semantic nuances of the community’s choice of words, references and memes. An examination of several “ticker sentiment trackers” available online reveals that the vast majority of data is labelled as neutral, meaning that the difference between positive and negative is not always statistically relevant. One year on, there is still no way to automatically monitor online sentiment with accuracy.
Despite moderation from the platforms, activity from automated bots adds further complexity. In January and February 2021, r/WallStreetBets users reported unnatural activity, complaining that automated bots were spamming the forum with irrelevant content as well as affecting the numbers of upvotes and downvotes that posts received. While new accounts that mostly posted vandalism could easily be spotted and removed by moderators, data showing who had upvoted any given comment was not visible. This made it difficult for moderators to identify posts that were artificially inflated through bots, rather than being genuinely popular due to organic user interest. This issue, and the accompanying risk of inorganic activity influencing the sentiment in online discourse about companies on these forums, persists today.
Current trends and future implications
The need for regulation has shifted the dynamic in the retail investment sphere over the past year. App-based retail investing services such as Robinhood, whose stated ultimate goal is to “democratize finance”, were at the centre of the meme stock narrative at the beginning of last year. After winning a significant portion of US retail investment activity with its payment-for-order-flow, zero-commission business model, its users became more experienced and sophisticated, resulting in the retail investors’ attack on Wall Street that caused serious losses for hedge funds and other professional traders.
As the platform came under scrutiny due to its enforced margin calls and subsequent trading freeze on several stocks, users became more sceptical of commission-free trading and started moving to competitors. Since its IPO in July 2021, Robinhood has relied more on cryptocurrencies than on equity trading for its growth. After reaching a record high of $85 per share in August, Robinhood shares dropped below the IPO price in October, its revenue dragged down by a slowdown in crypto trading combined with the decline in appeal of its business model.
Traditional investment managers are not the only entities that have recovered since January 2021. Market analysts are reporting that institutional investors are also enjoying a resurgence, with high volatility discouraging retail traders. The share of trading represented by retail investors continues to decrease, from a 24% spike at its peak in Q1 2021 to an estimated 18% today, and traditional metrics such as valuation and earning announcements have regained their relevance in driving the markets.
Although the waters may have calmed as institutions have reclaimed the lead, some issues raised by the meme stonks phenomenon, such as reliable computerised sentiment analysis and the need for regulation, still require addressing. A future organised effort by retail shareholders may pose as big a risk today as it did a year ago.