Why Wall Street Can’t Ignore The Next Stock Of Memes – Quartz

In early 2021, no one would have suspected that GameStop, then seen as a relic of a shopping mall, was about to embark on a dizzying rally that would reconfigure the power dynamics of Wall Street.

But by the end of January, mass internet fervor had pushed the company’s stock price to $ 325, from $ 19 earlier this month. Today, it is still hovering around $ 160, which is an eight-fold jump since its trading frenzy began. Backed by a group of passionate retail investors committed to prowl, the action defied the gravitational pull that ultimately brought the buzzing listed companies back to values ​​consistent with their business realities.

Almost a year after the WallStreetBets communities on Reddit and Discord orchestrated a massive squeeze on GameStop stocks, analysts and pundits say the ordeal has not fundamentally changed the mechanics of Wall Street. But the rise of the retail trader and the potential for coordinated mass buying and selling programs around popular memes stocks like GameStop are here to stay.

What is a stock of memes?

The very stock craze is a byproduct of a larger retail investor boom that has seen millions of people flood the stock market after brokerage firms introduced no-cost trading. Ten million people opened brokerage accounts in the first half of 2020, according to estimates by JMP Securities.

Brokerage apps like Robinhood, together with investor communities on Reddit and Discord, have helped gamify stock transactions and attract a new cadre of investors with a different agenda than the traditional institutional investor or investor. of the day trader.

How did GameStop turn into a memes store?

This explains how GameStop, a losing video game vendor, became a store of memes. Some redditors, including financial analyst Keith Gill, known as DeepFuckingValue and RoaringKitty, have been arguing since 2019 that the stock was undervalued because Wall Street did not understand the company’s role in the gaming industry. video and its potential to reinvent itself. In 2021, they attacked institutional investors betting otherwise by short selling more than 100% of GameStop’s shares. The short historical squeeze that followed has reframed popular conceptions about retail investors: they are now seen as a contingent that can operate with numbers and force.

“The good news is that Robinhood, WallStreetBets and Reddit have energized retail investors and attracted a lot of people to the market,” said Michael Pachter, GameStop analyst at Wedbush Securities. “But the bad news is, they’re usually misinformed investors and they play the trends, and it usually ends badly.”

Not only are there more retail traders, they are behaving differently as well. The boom in retail has popularized more complex and riskier financial investments. “A lot of these investors are now familiar with margin trading, options trading, they understand the short,” said Kelly Shue, professor of finance at the Yale School of Management. “They have become in some ways more sophisticated, but also much more heavily in debt.” Shue believes that the widespread trading of retail margins could potentially create more volatility in the market.

How to make money with meme stocks

Meme stock mania has also changed the way other players in the stock market act. For example, movie company AMC Entertainment, whose shares have jumped more than 600% since the start of 2021, tackled its meme status head-on, which GameStop was loath to do. CEO Adam Aron tweets frequently to piss off his investor base and engages in lengthy income calls where he answers questions from the masses. He even gave out free popcorn.

Aron treats AMC stocks like a consumer product because, well, it is. While institutional investors typically own the majority of shares in a given company, retail traders own 70% of AMC’s shares. And Aron isn’t just aiming for a higher stock price: he and the board have repeatedly issued more shares over the past year, signaling that they think their price is too high. .

Institutional investors vs individual investors

Stocks meme haven’t fundamentally changed short selling on Wall Street, but institutional investors have been more reluctant to publicly disclose – let alone post – short positions in certain stocks, especially if they are stocks. nostalgic brands like most meme stocks (e.g. GameStop, AMC, BlackBerry, Bed Bath & Beyond.)

“Shorts learn to be more disciplined to come out of their positions when the going gets tough,” Pachter said. “And I think real smart shorts are like, ‘Don’t get mad monkeys. Don’t fight the monkeys. Because monkeys don’t always behave rationally.

The new focus on short selling may have prompted regulators to take a closer look at the practice. A new rule proposed by the United States Securities and Exchange Commission may require greater transparency in the reporting of “securities lending” activity. Short sellers basically borrow stocks from lenders, sell them, and try to buy back the stocks for a lower price. The new rule would require those lenders to report the loan to a third party such as the Financial Sector Regulatory Authority (FINRA), which would make the disclosure public.

The Justice Department is also investigating the relationship between short-selling hedge funds and research firms to determine if they have engaged in illegal behavior. The news has thrilled memes traders, many of whom believe short selling is predatory.

The drunk guy at the poker table

Jaime Rogozinski, who founded the WallStreetBets subreddit in 2012 to discuss ambitious, if not risky investing, described the arrival of memes traders in the markets with a simple analogy:

“If you’ve been sitting at a poker table with eight people for 50 years and they’re all really good at the game, then the drunk guy comes and sits at the table… and all of a sudden he’s all-in. a tie-seven, not because he’s bluffing, but because he thinks he has the best hand, that messes you up, ”said Rogozinski, who is no longer in the squad.

“Everyone is still playing poker, all the players are still there, but when the drunk guy makes a move, you have to understand that this person’s logic is different. That person’s logic may even include, “I don’t care if I lose.” It is impossible to fight.

The memes traders may not have turned Wall Street upside down, but they sent a clear message: Ignore us at your own risk.