Wall Street’s Tools to Copycat Meme Stock Investor Successes

1/20/2022

Markets

0 min read

Is it Game-Over for Meme Stock Investors?

The tide turned about a year ago. Professional traders scoffed at the activity they were witnessing in presumed “dead” stocks. GameStop (GME), AMC Theaters (AMC), both skyrocketing. Even presumed pandemic nightmare companies such as Hertz (HTZ), international bulk carrier Seanergy (SHIP), and Norwegian Cruise Lines (NCLH) saw unexpected
buy interest from self-directed investors. TV pundits discussed how the retail traders placing these trades were going to get wiped out. Meanwhile, retail’s combined activity hurt the value of a few powerful funds, notably those that had massive shorts in some of these companies. Their activity even caused retail brokers like E*Trade (MS) and Robinhood (HOOD) to
halt
some activities in the popular retail shares. It used to be that small investors tried to mimic the professionals. Now, tools are being created so the big guys can monitor communication, sentiment, and activity on social media platforms such as Reddit, Twitter (TWTR), and Stocktwits.

Money Flows

Economics 101 tells us prices move up when demand increases with unchanged supply. This is just as true for stocks as it is for Gold,
oil, or even tulip
bulbs. By the same math, there are worthwhile companies whose value is not yet recognized that would likely be priced higher with more attention. And companies with extremely unpredictable tomorrows that, if the masses all moved to buy at once, would surely see a price increase.

A number of hedge funds that underestimated the tenacity of the r/wallstreetbets traders, were resolved to hold their short positions while the retail demand was increasing. In the end, it’s calculated that managed funds lost $20 billion in this Davey vs. Goliath match-up.

These money flows, possibly even stimulus
check funded accounts, “left a mark” on institutional investors. No previous experience or education prepared them for this phenomenon. Prices of fallen-from-favor household name stocks were soaring by hundreds of a percent. Their experience instead indicated they should side against the amateurs.

Change of Thinking

As it became widely known that retail traders or amateur investors plotting on social media and message boards were capable of running-up stocks or commodities, the pros took a “game-on” stance. It was a game they didn’t win, beaten down companies like GameStop rose 2,000% in the face of pros shorting the stock.

“If enough people with enough money start valuing stocks a different way, their new metrics matter, too, even if you think they’re absurd,” – Jim Kramer, discussing the climb in Wendy’s (WND) shares, June 8, 2021.

After almost a year, professionals are recognizing that the market’s climate has changed, and they should amass the tools they need to combat the new environment. A company called Sentifi, with the tagline “Better Investments With Collective
Intelligence,” has just signed a deal to provide “alternative data” to Morningstar. The company keeps track of hundreds of millions of messages across social media websites like Twitter and Reddit. It observes shifts in chatter that can help predict which companies or assets are about to soar or plummet. Morningstar which is one of the most broadly followed investment analytics providers will be integrating Sentifi’s sentiment and attentive analytics into its products as an additional toolset. The intent is to provide users, including fund managers, financial advisors, and other investors, a means to keep pace with market shifts and price signals. The expectation is to uncover shifts in sentiment early, discern investment opportunities and risks inherent in the changes.

While Morningstar is integrating Sentifi into its product line, many other companies, particularly hedge funds, began to rely on its analysis last year. Other large firms have built their own data gathering information systems. At UBS, analysts now monitor retail trading activity; in-house traders use the information as one of their decision-making tools. The investment bank directly tracks retail flows and volumes, analyzes options activity, and monitors social-media sentiment to determine the strength of what self-directed investors may be doing. Keith Parker is the head of US equity strategy at UBS, he has said, “For the most part, retail doesn’t impact or traffic in tons of stocks. But the ones that they do, they tend to have pretty outsized influence. And so it does matter at the extremes.”

Take-Away

As the expression goes, kill or be killed. As the markets evolve, so must the players in order to continue to interact with the market. An increasing number of professionals are not just taking retail stock market activity seriously; they are committed to benefitting from it. The benefit can be both offensive and defensive. It remains to be seen if the offensive plays that could be categorized as joining with the retail action will induce even more pronounced swings, but it is clear that information is readily available to them as the so-called meme stock investors are effectively writing their plays out where they can be seen and studied. Their tactics may need to be altered.

Paul Hoffman

Managing Editor, Channelchek

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