GameStop's Reddit Rally Puts Scrutiny on Social Media Forums

Anonymous social media posts by investors have fuelled cryptocurrency pump and dump schemes for years, according to studies.

By Reuters | Updated: 30 January 2021 10:28 IST

GameStop's Reddit Rally Puts Scrutiny on Social Media Forums

Photo Credit: Reuters

Some Redditors generated significant profits by gorging on shares of GameStop

Highlights

GameStop stock hit new heights recently
Investors have used social media for years
Reddit group moderators struggled to moderate the WallStreetBets group

Social media services including Facebook and Reddit restrict discussions about weapons, drugs and other illegal activity, but their rules do not specifically mention another lucrative regulated good: stocks.

Some people think they should. Users of a Reddit group, in which five million members exchange investment ideas, generated significant profits by gorging on shares of GameStop and other out-of-favour companies that had been shorted by big hedge funds.

Investors have used social media for years. Anonymous posts have fuelled cryptocurrency pump and dump schemes, according to studies, but that obscure market generated less scrutiny. The "Reddit rally" however, has roiled global stock markets and drawn scrutiny of posts in which thousands of smaller investors trade tips on platforms from Facebook to Instagram to Telegram and Clubhouse.

[Sponsored] Samsung Galaxy S24: The Ultimate Camera Phone With Smarter On-Device AI

Individual investors won praise from elected officials and the general public for jabbing powerful hedge funds with a "short squeeze." Yet critics have emerged, accusing social media users of manipulating markets unlawfully by pumping shares of weak companies. The manager of one Facebook trading community said she has turned down requests to tout individual stocks.

Social media companies are generally not liable for user activity under a statute commonly known as Section 230. Still, their rules bar illegal behaviour like facilitating gun and drug transactions or distributing offensive content that could rile advertisers or generate calls for tighter regulation.

Section 230 also has some carve-outs that in theory could lead to a tech company being penalised for user-generated content, including violations of federal criminal law, said Jeff Kosseff, a cybersecurity law scholar who wrote a book on the law.

Facebook Shuts Popular Stock Trading Group Amid GameStop Frenzy

He noted that the bar is high. The speech itself would need to be a criminal violation of a law that explicitly specified distribution of that speech as illegal.

In addition, First Amendment precedents typically hold that the companies must have knowledge of criminal speech posted on their platforms in order to be held responsible for it, said Kosseff.

Harvard Law School professor Jesse Fried said the stock trading forums appear to be "purely legal behaviour: irrationally exuberant buying by amateur investors."

WallStreetBets Reddit Group Briefly Shuts Doors, Turned Invitation-Only

Prosecuting users for deceiving investors is tough but possible, said University of California, Berkeley law professor Stavros Gadinis, adding that social media companies should have the same ability stock market operators do to intervene to stop alleged manipulation.

Identifying bad actors among the frenzy is a challenge. "There's all of these feedback loops and incentives behind the scenes," said Sinan Aral, director of the MIT Initiative on the Digital Economy. "We don't know exactly who was in the crowd."

The vast majority of traffic on Stocktwits, a social media platform for investors, appears to be people talking about stocks without evidence of manipulation, said Rishi Khanna, its CEO. He said the platform was not taking any extra moderation actions on this activity.

GameStop Rides Elon Musk Tweet to See 50 Percent Surge in Extended Trade

Grey area
Although Reddit has stated platform-wide rules - including no illegal content or soliciting or facilitating illegal transactions - the service relies heavily on community-based moderation. Users who act as moderators make and enforce guidelines about what is permissible.

The founder of the WallStreetBets Reddit community Jaime Rogozinski, who was a moderator of the group until April 2020, said he tried to draw lines on what to allow. He said he and other moderators removed illegal attempts to game the market, such as claiming to have insider information. When there were grey areas, he said they played it safe.

"You'd have attempts for pumping up stock and I still to this day am not sure what the regulation was, but I never wanted to find out," said Rogozinski.

Archived copies of the forum showed a ban on "market manipulation" topped its list of rules by April last year. The current moderators said they struggled to moderate the WallStreetBets group as traffic surged, briefly causing technical errors at Reddit this week.

A spokeswoman said earlier this week that Reddit would "review and cooperate with valid law enforcement investigations or actions as needed."

Discord, which hosts many trading discussions, said its rules bar users from engaging in "any illegal behaviour." Discord on Thursday said it was working with the "Wallstreetbets" room team to moderate its new server, after removing the previous server over hate speech and misinformation. It did not address stock market influence.

A lack of closer scrutiny on the matter has left open the opportunity for potential manipulation. Former Merrill Lynch financial adviser Cassandra Cummings, 47, who now manages 80,000-member Facebook trading group The Stocks and Stilettos Society, said she declined multiple requests in the last year to rally her group around a specific stock.

"They know that I have the power through my group to move that company stock price," she said.

What will be the most exciting tech launch of 2021? We discussed this on Orbital, our weekly technology podcast, which you can subscribe to via Apple Podcasts, Google Podcasts, or RSS, download the episode, or just hit the play button below.

Affiliate links may be automatically generated - see our ethics statement for details.

Comments

For the latest tech news and reviews, follow Gadgets 360 on X, Facebook, WhatsApp, Threads and Google News. For the latest videos on gadgets and tech, subscribe to our YouTube channel. If you want to know everything about top influencers, follow our in-house Who'sThat360 on Instagram and YouTube.