Why Wall Street Can’t Ignore The Next Meme Stocks – Quartz

By early 2021, no one could have imagined that GameStop, then seen as a shopping center relic, was about to kick off a dizzying rally that would reconfigure Wall Street’s power dynamics.

But by the end of January, the massive internet fire had pushed the company’s stock price to $325, from $19 at the start of the month. Today, it still hovers around $160, representing an eightfold jump since the beginning of its trading frenzy. Backed by a cadre of passionate retail investors ready to go hodling, the stock has defied the pull that ultimately reduces hyped public companies to values ​​consistent with their business realities.

Nearly a year after the WallStreetBets communities on Reddit and Discord orchestrated a massive short squeeze on GameStop stock, analysts and experts say the ordeal hasn’t fundamentally changed the mechanics of Wall Street. But the rise of the retailer and the potential for mass-coordinated buying and selling schemes around popular meme stocks like GameStop are here to stay.

What is a meme share?

The meme stock craze is a byproduct of a broader private investor boom that has flooded millions into the stock market after brokers introduced free trading. Ten million people opened securities accounts in the first half of 2020, according to estimates by JMP Securities.

Brokerage apps like Robinhood, in partnership with investment communities on Reddit and Discord, gamified stock trading and attracted a new cadre of investors with a different agenda than the traditional institutional investor or day trader.

How did GameStop turn into a meme stock?

That explains how GameStop, a notable retailer of physical video games, became a meme stock. Some redditors, including financial analyst Keith Gill, known as DeepFuckingValue and RoaringKitty, argued since 2019 that the stock was undervalued because Wall Street failed to understand the company’s role in the video game industry and its potential to reinvent itself. In 2021, they went after institutional investors who bet the opposite by shorting over 100% stake of GameStop. The historic short squeeze that followed reformulated popular perceptions of retail investors: they are now seen as a contingent that can operate with numbers and power.

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

Not only are there more retailers, but they also behave differently. The retail boom has led to more complex and riskier financial investments. “A lot of these investors are now familiar with margin trading, options trading, they understand shorting,” said Kelly Shue, a professor of finance at the Yale School of Management. “They’ve become more sophisticated in some ways, but also much more exploited.” Shue believes widespread retail margin trading could ultimately increase market volatility.

How To Make Money With Meme Stocks

Meme stock mania has also changed the way other stock market players trade. For example, cinema company AMC Entertainment, whose shares have risen more than 600% since the start of 2021, has tackled its meme status head-on, something GameStop didn’t like to do. CEO Adam Aron often tweets to inflate his investor base and engages in lengthy earnings talks, answering questions from the masses. He even handed out free popcorn.

Aron treats AMC stock as a consumer product, because it is. While institutional investors usually own a majority stake in a particular company, retail traders own as much as 70% of AMC’s stock. And Aron isn’t just aiming for a higher share price: he and the board have repeatedly issued more shares over the past year, indicating they think it’s too expensive.

Institutional Investors vs. Retail Investors

Meme stocks haven’t fundamentally changed short selling on Wall Street, but institutional investors have been more reluctant to publicize — let alone show off — short positions on certain stocks, especially if they’re nostalgic brands like many of the meme stocks. stocks (for example GameStop, AMC, BlackBerry, Bed Bath & Beyond.)

“Shorts learn to be more disciplined about getting out of position when things move against them,” Pachter said. “And I think the real smart shorts are like, ‘Don’t buck the apes. Don’t fight the monkeys.’ Because the monkeys don’t always behave rationally.”

The renewed focus on short-selling may have warned regulators to take a closer look at the practice. A newly proposed rule from the U.S. Securities and Exchange Commission could: need more transparency when reporting securities lending activity. Short sellers essentially borrow shares from lenders, sell them and try to buy the shares back at a lower price. The new rule would require those lenders to report the loan to a third party such as the Financial Industry Regulatory Authority (FINRA), which would make the disclosure public.

The Justice Department is also investigating the relationship between hedge fund short-selling and research firms to determine whether they have engaged in illegal conduct. The news excited meme traders, many of whom believe that shorting is predatory.

The drunk man at the poker table

Jaime Rogozinski, who? founded the WallStreetBets subreddit in 2012 as a place to discuss ambitious, even risky investments, it described the arrival of meme traders to the markets with a simple analogy:

“If you sit at a poker table with eight people for 50 years and they’re all really good at the game, and then the drunk guy comes and sits at the table… and suddenly he goes all in on a two-seven, not because he bluffs, but because he thinks he has the best hand, it ruins your game,” says Rogozinski, who is no longer part of the group.

“Everyone is still playing poker, all the players are still there, but when the drunk man makes a move, you have to understand that this person’s logic is different. This person’s logic may even be, “I don’t care if I lose.” There is no fighting against that.”

Meme traders may not have rocked Wall Street, but they sent a clear message: ignore us at your peril.