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Social Media and Stocks: Information or Just Noise?
Presented by Dr. Allan Zebedee
February 12, 2021 @ 2:00 pm – 3:00 pm EST
Most models of financial markets include two types of traders — informed traders and noise traders. Informed traders help the financial markets arrive at the equilibrium or fair price of a security while noise traders distract from this price process. In recent years, social media has exploded with stock tips promising readers riches. While stock tips are not new, the ability of social media to mobilize a large number of investors and the innovation of new trading platforms such as Robinhood have created a potentially new paradigm. Meme stocks as they are frequently referred to in the media garner significant social media interest and in many cases pandemonium ensues. For example, GameStop has pitted Wall Street against Main Street. Wall Street has questioned the financial viability of GameStop a consumer electronic retailer with over 5,100 brick and mortar stores.
Last year, GameStop had declining sales that resulted in a loss of $471 million. Wall Street responded by selling shares of GameStop, shares it does not own but nonetheless is able to sell through short selling. Short selling is a trading strategy that hinges on the speculation that a stock’s price will decline. By selling shares they do not own, traders taking short positions are betting they can buy the shares back at a lower cost. GameStop is one of the most shorted securities in the US financial markets. With roughly 70 million shares issued by GameStop, short sellers have sold an additional 60 million shares creating an over-supply of shares.
WallSteetBets, an internet forum on the social media website Reddit, recently urged followers to buy shares of GameStop increasing demand and the price. As the share price increases, short sellers are either required to put additional capital behind their bets or add to the buying frenzy by purchasing shares to cover their short position and thereby adding to the upward price pressure. This is referred to as a ‘short squeeze’. Over the last month GameStop has gone from a low share price of approximately $20 per share to a high of nearly $380 to a current price of $50. It has been wild ride; millions have been made and millions have been lost. In this talk I will present a case study of GameStop in an effort to answer the question — has the rise of meme stocks created a new paradigm between informed traders and noise traders?
Allan Zebedee is an Associate Professor of Finance in the Reh School of Business. His research and teaching interests include investments and corporate disclosure. He is a former Fulbright Scholar and Research Fellow at the US Securities and Exchange Commission. Prior to joining Clarkson University in 2007, Professor Zebedee was an Assistant Professor at San Diego State University. He received a Bachelor of Arts from Colby College and a Ph.D. from University of California, San Diego.
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