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At the speed of one click, thousands were virtually united, triggering a massive shift in the stock market. The widespread use of social media and increasing reliance on technology in daily life have significantly influenced the finance industry and modern investor decision-making. Platforms such as Instagram, TikTok, X, and notably Reddit provide investors with a streamlined mechanism for accessing key information and collaborative discourse surrounding the stock market. The Financial Industry Regulatory Authority (FINRA) conducted a National Financial Capability Study of 2021 to analyze modern-day trading habits. The study revealed that a majority of investors under the age of 35 named social media as an information source they regularly consult when seeking to invest. The social investing movement offers numerous benefits, such as increasing accessibility to market knowledge and enhancing public financial literacy. However, it also carries the risk of significantly disrupting the investment industry through targeted market manipulation, as seen during the GameStop and AMC stock frenzy in 2021.
In the finance industry, individual investors, known as retail traders, buy and sell securities for their personal accounts rather than on behalf of a group or institution, such as a hedge fund. The phenomenon of social investing arose through the convergence of retail investors and social media. Social investing occurs when stand-alone traders utilize online platforms to discuss potential investment strategies and ideas. From this, the term “meme stock” emerged to describe a stock that rapidly inflates in price due to heightened attention from internet communities, often gaining virality on platforms like Reddit.
In 2021, the Reddit page WallStreetBets united retail investors through social media to influence the stock prices of GameStop ($GME) and AMC ($AMC). This effort challenged traditional market dynamics and institutional investors. WallStreetBets is a subreddit and online community where people engage in online discussions surrounding stock trading tactics in an unserious, humorous manner through the use of jokes and memes. In January 2021, members of the page rallied around the struggling GameStop stock and encouraged others to buy shares and options, leading to a dramatic price surge.
This movement underscores the power of social media in influencing market dynamics, showcasing how retail investors’ collective action can challenge institutional investors and short sellers. However, the GameStop and AMC saga also raised important questions about market manipulation and the responsibilities of social media platforms in moderating discussions. Officials from the SEC noted that although the surge in stock prices was driven by genuine investor interest, it blurred the lines veering into unethical market manipulation and raised concerns surrounding future social investing.
Gamestop
GameStop, a video game retailer with a vast network of stores across the country, began faltering in the mid-2010s as gamers increasingly shifted to downloading their games online. In 2019, major hedge funds began betting against GameStop, seeing its declining influence and sales. This type of betting tactic is known as short selling—a strategy in which investors borrow shares to sell, hoping to buy the shares back later at a lower price and profit from the difference. By 2020, pandemic shutdowns threatened GameStop’s survival, but Reddit users, particularly those on WallStreetBets, identified that approximately 140% of GameStop’s public stock had been sold short, with some borrowed shares being re-lent. As the stock price soared, this caused retail investors to buy up GameStop shares and create a short squeeze. A short squeeze occurs when a rapidly rising stock price forces short sellers to buy back shares to minimize losses. This wave of buying creates more upward pressure on the price, triggering a spiraling effect.
As a result, this phenomenon dramatically reversed the downward trajectory of the stock the hedge funds had anticipated. The situation reached a breaking point in January 2021. The stock, which closed at $17.25 on January 4, began an astronomical rise as retail investors coordinated through social media platforms to buy shares. This vulnerability forced hedge funds into a corner: as the stock price rose, they had to buy shares to cover their positions, driving the price even higher. One of the most notable figures to emerge from the chaos was Keith Gill—who not only kickstarted the movement but also invested $50,000 of his family’s savings when GameStop was just $5 a share. As his holdings skyrocketed to a jaw-dropping $48 million in value, he transformed from an unknown retail investor into a folk hero practically overnight, inspiring thousands of others to join the frenzy.
The squeeze peaked dramatically, and on January 27, the stock opened at $354.83. The next morning, Robinhood and other brokers controversially halted buying while only allowing the selling of existing positions. This intervention effectively killed the momentum. By February 19, the stock had plummeted to $40.59 as the squeeze subsided. The event caused massive losses for major hedge funds like Melvin Capital, which lost 53% of its total investments in January and required a $2.75 billion bailout from Citadel to survive.
AMC
After WallStreetBets users identified GameStop meme stock, they turned to AMC Entertainment Holdings Inc. (AMC) stocks because of its high short interest. During the COVID-19 pandemic, AMC’s revenue dropped 54% between January and September of 2020. Despite this decline, AMC stock prices unexpectedly rose due to the WallStreetBets forum. In January 2021, AMC secured almost $1 billion in funding through stock offerings and a line of credit to maintain its theater business while moviegoers were quarantined. After securing funding, AMC’s shares received the same attention as GameStop shares.
AMC shares started 2021 at around $2. On January 25, AMC was trading at around $4.50 per share. Two days later, the price jumped to around $19 per share. Between February and April 2021, the stock price hovered between $6 and $14 but increased throughout May. Amidst this phenomenon, AMC’s largest concern was its $5.6 billion in long-term debt. However, AMC remained optimistic and leaned into the online enthusiasm for the company. On June 1, 2021, AMC announced that it had raised $230.5 million by selling 8.5 million shares to Mudrick Capital Management, capitalizing on the surge in meme stocks. The next day AMC reached its peak at approximately $62 per share. Luckily for the theater chain, movies were lined up for release during the summer, and a new round of the COVID-19 vaccination became available in August 2021. The rapid spread of information on social media played an important role in keeping AMC afloat during the COVID-19 pandemic.
Legal Implications
In analyzing the legality of WallStreetBets, former SEC Enforcement Chief John Reed Stark explained that SEC manipulation cases typically involve (1) creating a false sense of interest in a stock or (2) spreading misinformation to manipulate prices.
Retail investors on Reddit’s WallStreetBets openly discussed their strategies and motives in both the Gamestop and AMC situations. Stark emphasizes that transparency is key—mere excitement about a stock, as was the case here, is not fraudulent if there is no intent to deceive or distort the market. Additionally, First Amendment protections constrain the SEC’s ability to intervene. The agency cannot police free speech or discussions about investment strategies if there’s no fraud involved. While disruptive, neither the GameStop nor the AMC frenzy, rise to the legal threshold to qualify as securities fraud.
In February 2022, in response to the market volatility surrounding short selling, the SEC proposed two financial regulations to help identify potentially abusive trading practices: Rule 205 and the Exchange Act Rule 13f-2. The SEC sought to provide more visibility into the behavior of large short sellers and to facilitate better oversight of the markets. The new proposed provision of Regulation SHO, called Rule 205, would require broker-dealers, like Robinhood, to mark purchase orders as “long,” “short,” “short-exempt,” or “buy to cover.” Proponents of Rule 205 support the “buy to cover” requirement because it would aid the SEC’s monitoring of short-selling activities and help to ensure compliance with the Regulation SHO. However, opponents are concerned about the extensive cost and burden of creating new systems to report “buy to cover” orders. Thus, the SEC ultimately decided not to adopt the Proposed Rule 205. Instead, modifications were made to the text of Rule 13f-2 to provide context and enhance the comprehensibility of the rule. In October 2023, the SEC adopted Rule 13f-2, which requires institutional investment managers to report on Form SHO information on short position data and short activity data for equity securities. Although this rule may require implementing enhanced systems to record this data, the SEC seeks to promote transparency to investors as a result of the GameStop and AMC saga.
Navigating the Future
Moving forward, regulators will likely face increasing pressure to conform to social media’s rising influence over the financial industry. As these platforms continue to influence investor decision-making, it becomes crucial for all stakeholders—investors, regulators, and platforms—to effectively navigate this new environment. The rapid spread of information, whether accurate or misleading, can lead to market volatility and real-time fluctuations in stock prices. Market fluctuations, in turn, highlight a pressing need for better communication strategies, regulatory frameworks, and education initiatives. From the need to protect investor freedom to ethical concerns, such as retirement accounts being tied up in the market, conflicting priorities complicate market activity regulation while striving to preserve individual liberties. Ultimately, adapting to these dynamics will be vital for ensuring a fair, transparent, and thriving financial system in the future.
*The views expressed in this article do not represent the views of Santa Clara University.
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