Like it or not, the influence of social media over the stock market — and the historic GameStop rally — is likely here for the long haul.
The influence a single tweet from Tesla CEO Elon Musk or Social Capital CEO Chamath Palihapitiya — who together sport nearly 44 million followers on Twitter — has on the market was evident after GameStop Corp.’s stock surged 93% on Tuesday following tweets from both CEOs saying they are taking positions in GameStop stock.
Musk’s tweet linked to a Reddit board showing the strategy of Reddit stock-trading discussion group r/WallStreetBets. The tweets and threads created internet mayhem and ultimately pushed the video game retail business to a $24 billion market cap by the end of the day Wednesday.
"Reddit’s site-wide policies prohibit posting illegal content or soliciting or facilitating illegal transactions,” a spokeswoman wrote in an email to InvestmentNews. “We will review and cooperate with valid law enforcement investigations or actions as needed."
The social media platform has not been contacted by authorities over stock surges driven by the message board on the platform, according to published reports. However, the online forum is ready to comply with any legal implications that may come up, according to the spokeswoman.
Still, GameStop’s stock surge only confirms the power of social media and the broader implications are that social media outlets combined with the democratization and gamification of online trading will continue to fuel abnormal concentrated trading volumes, said Sophie Schmitt, senior analyst with Aite Group.
“Online trading firms will need to scale up their operations to a new level in this environment,” she said.
The market frenzy that was spurred by social media is also a trend that has slowly progressed since last year as the rise of internet influencers started to drive purchases of individual equities and cryptocurrencies, according to Humphrey Yang, social media influencer and former financial adviser. Yang boasts a following of more than 1.6 million users across his social media platforms including TikTok, YouTube, Instagram and Twitter.
“What’s interesting is that Twitter and social media have a huge impact on retail investor trading,” Yang said. “[A year ago], I didn't think that retail investors through social media could make that much of an impact on equity prices, especially because institutions have so much skin in the game.”
Today, it’s as if social media is a part of retail traders’ strategy. “It’s like now they are saying: ‘How can we get 1,000 retail traders to actually make a big difference in stock price?’ And when one of the richest people in the world is tweeting about it, it’s almost like everyone’s in on the joke,” he said.
GameStop’s stock surge coupled with social media discourse was like pouring kerosene on a fire in the battle between small investors and Wall Street. In fact, SkyBridge Capital’s Anthony Scaramucci called the phenomenon the “French Revolution of Finance” via Twitter on Wednesday.
The frenzy even prompted Ritholtz Wealth Management CEO Josh Brown to jump on an “emergency market update” live stream via YouTube Wednesday morning to discuss the chaos.
“People are mocking TikTok and Robinhood traders about their finances, like what do you think we were doing when we were 21 years old?” Brown said. “Like we were all geniuses? It’s not like we're doing asset allocation, we were trading whatever the most volatile stocks were of that day and making mistakes and blowing up options and learning.”
In that light, Brown said he believes this group of retail investors are simply “done” being spoken down to or mocked by Wall Street investors.
“This is the Velociraptors learning to use the doorknob, we've had a year of people teaching themselves to trade, and they're not stupid,” Brown said. “They see what's been going up in all these stocks that the experts told them would go down.”
On top of that, the easy-to-use free trading apps like Robinhood have invigorated retail investors to move markets as these apps took down the barriers of entry, said Ben Carlson, director of institutional asset management at Ritholtz Wealth Management.
“It’s not only the social media stuff, Robinhood set this in motion when they started offering zero-percent commission-free trading,” Carlson said. “That was like a domino a few years ago that got this thing rolling, and now every brokerage went to free trades.”
While retail investors have been patronized by traditional Wall Street saying that they don’t understand the market or how to trade, Ritholtz Wealth Management's Michael Batnick believes this feedback only entices small investors to trade more.
“This is a structural issue: it’s social media, it’s markets, it’s with us for the duration,” Batnick said. “These [retail investors] have never been more galvanized by traditional Wall Street people saying that they're dumb. But think about how many lattes they can now buy.”
“I’m seeing more disputes like this between advisors and other advisors at the same practice,” said one industry executive.
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