Social stock: how social media and influencers affect financial markets

Photo by Lorenzo Cafaro via Pixabay

By Luciano Cesta
Boston University News Service

On Jan. 27, the value of the Game Stop stock skyrocketed to $347.51. This was a stark contrast from the stock’s value of $147.98 on January 26; and, it was an even sharper increase from the stock’s value — $17.25 — at the beginning of the year.

This 95% change in value was not random, nor was it influenced by anything that GameStop did itself. A group of people on the Reddit forum “Wall Street Bets” (WSB) campaigned to rally the stock, retaliating against hedge funds who were betting on its failure. These funds were attempting to short the stock. In response, members of Reddit, known as “Redditors,” purchased the stock on mass, increasing the value of the stock.

The unnaturally high valuation of GameStop stock, however, did not last long. Robinhood, an app for small-time investors that was popular with the WSB community, restricted trading on the stock temporarily; this prevented the stock from climbing even higher. People eventually sold the stock off on mass and sent the price tumbling; by February 12, the stock plummeted to $52.40.

The GameStop stock bubble is not the first of its kind. The early 200os saw several stock market bubbles of their own. This includes the housing stock bubble that partly led to the 2008 economic crisis and the early 2000s dot-com stock bubble that resulted in many overvalued tech stocks crashing display. As these stock market bubbles display, if a stock is overvalued, it will likely line up with its true value eventually. 

Social media significantly influenced finance as well. Elon Musk, the founder of Tesla and SpaceX, has engaged in cryptocurrency and stock market trading through his Tweets. According to CNBC, a February 4 tweet from the tech billionaire caused the value of Dogecoin, a cryptocurrency inspired by a meme of a Shiba Inu dog, to surge more than 50%. In 2018, the Securities and Exchange Commission (SEC) charged Musk with market manipulation after tweeting that he was considering taking Tesla private; this tweet resulted in a 6% increase in Tesla’s stock.

Peter Gloor, a research fellow for the MIT Center for Collective Intelligence, said that influencers’ comments about stocks are key metrics in predicting market activity with Twitter.

“If you mine communication archives in a certain way — and the simplest way is just looking at the amount of tweets about a certain stock and the emotion of the tweets — the last twist is looking at what influencers say in social media about a certain stock,” Gloor said.

Gloor believes that echo chambers were a contributing factor in the GameStop stock situation.

“Traders were basically communicating among themselves in that Wall Street Bets forum,” Gloor said. “If [a person] has heard something five times, and if [that person] heard it from people [that person] trusts, [he or she will] believe [what they are told] whether it makes sense or not.”

Whether or not echo chambers or influencers are fueling changes in financial markets, it seems that social media can affect market activity. While Gloor’s research looked at using social media as a stock market predictor, the market soon became manipulated by social media.

“As soon as people became aware that tweets are actually a great way of measuring, traders started to try to manipulate the social media to their advantage,” Gloor said. 

The world of social media has forced the financial and legal world to evolve as well. The most recent incident with GameStop has resulted in the newest push for changes in the handling of stocks.

On Thursday, Feb. 18, Congress will be holding a hearing to discuss the implications of the GameStop stock event. Vlad Tenev, the Chief Executive Officer of Robinhood, will be among the witnesses testifying at the hearing. 

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