Skip to main content

03 February 2021

GameStop: the crowd bites back?

Professor Alex Preda, Professor of Accounting, Accountability and Financial Management & Co-director of the FinWorks Futures Centre

Campaign against hedge funds driven by algorithms as well as persuasion

a man sits at his laptop in a bright living room, he is smiling at the phone he is holding
A day trader celebrates stock market gains. Photo by MayoFi from Pexels

Over the last few days, a lot of public attention has been directed at retail investors and the losses they inflicted on short-selling hedge funds. First, GameStop. Then, silver. Is this sort of activity bound to continue? From now on, are we going to see retail investors regularly coming together and focusing their attention on this or that stock, this or that commodity, moving market prices up or down by significant amounts?

The story of GameStop has been framed differently by different commentators: as plucky little investors battling bad hedge funds; as a bubble which was eventually going to burst; as the wisdom of crowds, or the foolishness of crowds (take your pick). There have also been calls for more regulation, interestingly, frequently these calls have been made by the hedge funds.

Depending on your perspective, this is a heroic narrative, or a comedic one. We are hearing a revival of the dotcom boom stereotype of bored young men spending time in basement offices, in front of their trading screens.

However, there is certainly a consensus that retail investors can have the power to move markets. It is too early to tell whether the dominance of institutional investors that has been a feature of Western financial markets since the 1960s is being eroded in a lasting way, but signs point to a growing share of retail investors in the trading volume of Western financial exchanges. This could bring Western markets more in line with Asian developed economies, where retail investors have had a substantial presence.

To understand how such a market might behave, we need to consider the impact of social media. Commentators have mostly focused on social media making it possible to exchange messages and mobilize retail traders by persuading them to act in a certain way. But we should also consider how social media impacts the trading behaviour itself.

In my research I have investigated the way that traders use the many dedicated communication channels on trading platforms. These forms of built-in social media often categorise traders, giving them public rankings based on a series of metrics. Users are then given opportunities to follow the top ranked traders and copy their transactions and strategies, for instance by integrating ‘copy trade’ algorithms in the trading platforms.

If we take the impact of these algorithms into account, the GameStop story is less a story of heroes mobilizing a crowd into a ‘moral’ crusade, and more of a story of how technologies embedded in trading platforms make imitation and the formation of crowds much easier.