A Cinderella story where Cinders teams up with her stepsisters and together they overthrow the monarchy (sort of).
It is difficult, these days, to find some as-yet-untold aspect of the GameStop story. The ire of deep-pocket investors, the glee of the apes (as the now six million members of the subreddit call themselves), and the bemusement of the rest of us have made it one of the most talked-about topics of the last three months. Multiple cinematic depictions of the events are already in the works, and the founder of Wall Street Bets has sold the rights to his life story (a foreboding phrase if there ever was one). But what makes this particular market hiccup different from any other?
Grappling with the impact of internet hype on the stock market is nothing new. In 2001, a pre-Moneyball Michael Lewis followed up with a14-year-old boy in suburban New Jersey who had been arrested by the Security and Exchange Commission for apparent manipulation of the market using online forums. Specifically, the kid created four AOL email addresses, watched CNN’s finance broadcast, did some research, and posted his findings on Yahoo finance sites. The trading volume of the relatively small-scale companies he wrote about, which usually saw 60,000 trades a day, skyrocketed to the millions. He earned over $800,000 in just six months.
This terrified the SEC. Started in 1934, its post-Black Tuesday organizing principle was to reassure people that the money invested in the stock market was based on real value, and that no one would manipulate the prices of shares. Technically, this meant preventing the promotion of a stock for the purpose of artificially raising its price. But if all promoted analysis changes the market, how can one distinguish the intent? A Bloomberg study in 1996 found that amateur traders online were actually significantly more accurate in their predictions than Wall Street analysts (they were off by 21% and 42%, respectively), but that the professional investors’ commentary could decrease a company’s value alone, even if its financial filings showed gains. A confused SEC eventually left Jonathan alone with most of his winnings, and the question of manipulation remained.
Building on this shaky legal foundation, let us also consider the fact that, apart from the short-lived curtailments associated with the 2008 bailout legislation, an incredibly successful bipartisan effort has been underway to deregulate the financial industry since the late 1970s. Laws passed in the later ’80s allowed for deposit-taking institutions to make more of their revenue from high-yield investment banking. In the ’90s, the SEC also encouraged investment banks to start taking deposits from individual lenders. This dumped a huge amount of extra capital into the markets, and the US stock markets grew to twelve times their original size in two decades. Finally, the government decreased its oversight just as more complicated and risky methods of trading — enabled by breakthroughs in technology that allowed for greater, and faster, computational power — were becoming popular with the biggest firms. By the end of the century, investment corporations were being allowed to make bigger gains and take more risks with our collective savings than ever before.
Fast forward to January. It should come as no surprise to you, dear readers who have followed me this far in the narrative, that a small, populist uprising is playing an outsized role in the stock market right now. A quick summary for the uninitiated: the half-ironic, half-earnest investors of the Wall Street Bets subreddit had been paying close attention to mediocre performance of GameStop stock (GME) for years. In general, the forum is particularly drawn to stocks that are heavily shorted — that is, stocks that hedge funds have bet against, hoping that the companies’ stock will continue to do badly. But in early January, GME unexpectedly gained value after a single investor bought a third of the available stock (nine million shares) and assumed a position on the board. This increase in value in a stock that was predicted to do poorly caused some short sellers to sell their positions and re-buy shares, driving the price even higher.
WallStreetBets then took up the rallying cry, and the community (propelled by nationwide media outlets) drove so much interest in the stock that even more short sellers were forced to switch their positions, all of which fueled the stock’s growth. During the peak in activity, several of the major trading platforms (Robinhood, E-trade, and others) halted the trade of GME on their platforms. Many amateur traders and laypeople cried foul — if real Wall Street analysts’ claims about stocks changed the market, why was it so bad if normal people did the same thing? While RobinHood, for one, later clarified that they halted trading because they had overdrawn their credit lines, the question remained — what counts as manipulation of the stock market, and what is unfair in such a speculative industry?
To evaluate this question, I turned to the threads themselves. Reddit has an easy-to-use API, and a few lines of code (and, to be honest, several hours of tinkering) later, I had downloaded two thousand posts each from Wall Street Bets and r/Security Analysis, a purportedly “serious” investment thread. My goal was to see if I could build a model to predict the difference between the two subreddits, and if so, understand how they deviated. Some challenges were obvious at the outset: because r/wallstreetbets is so active, two thousand submissions are posted on a single day. Conversely, it took r/SecurityAnalysis nearly four months to generate the same amount. To combat this problem, I took two slices of WSB data — one from mid-March 2021, and one from early January (before the GME explosion).
After some finagling, I managed to fit a fairly accurate Multinomial Naive Bayes Model to the vectorized text data. This process involved stripping all the punctuation and funky characters from the text, and then setting as my predictors the counts of all of the words that appear anywhere in either subreddit. The model then predicts, given the odds that that word appears (or not) in a given post, whether the post is likely to be from one subreddit or the other. My results, even on fairly limited data, were somewhat surprising: I could fairly easily distinguish between the two subreddits, consistently classifying about 87% of them correctly.
What formed the basis of this distinction, you ask? The biggest differentiators between the two threads (based on an almost-as-accurate but more interpretable logistic regression) were the nature of the slang that they used. For instance, every instance of ‘ape’, ‘apes’, ‘moon’ or ‘stimmy’ in a post meant that post was likely 4–7 times as likely to be a r/wallstreetbets post versus a r/security analysis post. Conversely, more professional terms like “thesis” and “equity” indicated equally strongly that the post likely came from the Security Analysis subreddit.
The second stage of the analysis was only partially successful, but still useful. Using some extremely basic regular expressions, I attempted to pull out all of the stocks mentioned most frequently in either of these forums, including both the current r/wallstreetbets data and the threads from January 8th. As it turns out, there is a heavy amount of overlap. My clunky stock-scraper caught many stock-ticker-like words, but the companies circled in red are verified mentions of real stocks. Both threads discuss not just GME, but also Tata Motors (TTM), the Chinese automaker NIO, and General Motors (GM).
This analysis does not delve into the substance of the financial discussion on each board, and it cannot say for sure whether the Wall Street Bets community is so powerful that the resulting market frenzy from stocks mentioned on its boards resulted in their subsequent mention on r/SecurityAnalysis. Large financial institutions have, in fact, acknowledged that WSB mentions of TSLA (a highly predictive word in the January 8th stock data) were correlated with the stock’s value on the market, for instance.
But at least from this initial analysis, the primary difference between serious and informal investment forums is the language they use — not the stocks they describe. If a group of investors that love memes come together to identify a vulnerability in the market positions of massive hedge funds — over-shorting on an unstable company — is it not acceptable practice to seize this opportunity, legally, for personal gain?
Thinking beyond the model, the primary difference between the two groups seems to be that Wall Street Bets is willing to use its community to work as a team — something that is new for the finance world outside of Wall Street. Collaboration is traditionally only allowed within closed ranks: business executives that provide professional analysts with tips on their companies, leading to surging stock prices for the well-connected and tumbling ones for those out of favor. It would be ridiculous to claim that the groupthink mentality of Wall Street Bets investors is anything new to the industry — it’s just a practice that is usually performed in a smaller group, amongst those with more power and influence. Somehow, a bigger, poorer, and less-organized community was able to organize around its own financial assessments — at least for a few weeks.
That this behaviour actually spells a systemic change in the power dynamic between individual investors and hedge funds is highly unlikely, but it is the logical succession to the actions of a teenager who, 20 years ago, used the internet to bamboozle the finance world and make money in a highly speculative industry usually controlled by large corporations. Whether there are any lasting effects, we shall have to wait and see — that, or get in on the action and join the apes taking RKT to the moon.
Sources:
https://www.cnn.com/2021/03/17/media/wallstreetbets-founder-jaime-rogozinski-uta/index.html
https://finance.yahoo.com/news/tesla-stock-performance-wallstreetbets-mentions-030527307.html
https://iamnotafinancialadvisor.com/discord/DD/og/GMEv11.pdf
