GameStop and Other ‘Meme Stocks’ Hyped by Social Media Bots, Analysis Shows

The extent to which the bots influenced stock prices was unclear.

By Reuters | Updated: 1 March 2021 10:01 IST

GameStop and Other ‘Meme Stocks’ Hyped by Social Media Bots, Analysis Shows

GameStop closed 6 percent lower as early rally fizzled but the stock finished the week 151 percent higher

Highlights

Analysts have struggled to find a clear explanation
Analysts mostly ruled out a short squeeze
Retail investors have been buying deep out-of-the-money call options

Bots on major social media websites have been hyping GameStop and other "meme stocks," although the extent to which they influenced prices was unclear, according to analysis by Massachusetts-based cyber security company PiiQ Media.

GameStop closed 6 percent lower on Friday as an early rally fizzled but the stock finished the week 151 percent higher in a renewed surge that left analysts puzzled.

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The video game retailer's shares closed at $101.74 (roughly Rs. 7,500) after retreating from a session high of $142.90 (roughly Rs. 10,540). The weekly rocket ride higher came despite a broader market selloff that sent the benchmark S&P 500 down 2.5 percent over the same time.

Analysts have struggled to find a clear explanation, and some were skeptical the rally would have legs.

"You might be able to make some quick trading money and it could be a lot of money, but in the end, it's the greater fool theory," said Eric Diton, president and managing director at The Wealth Alliance in New York. The theory refers to buying stocks that are over-valued, anticipating a "greater fool" will buy them later at a higher price.

Analysts mostly ruled out a short squeeze like the one that fueled GameStop's rally in January, when individual investors using Robinhood and other apps punished hedge funds that had bet against the stock, forcing them to unwind short positions. Many GameStop buyers took their cues from online investment forums on Reddit and elsewhere.

Short interest accounted for 28.4 percent of the float on Thursday, compared with a peak of 142 percent in early January, according to S3 Partners.

Options market activity in GameStop, which has returned to the top of the list in a social media-driven retail trading frenzy, suggested investors were betting on higher prices, higher volatility, or both.

Refinitiv data showed retail investors have been buying deep out-of-the-money call options, which have contract prices to buy far higher than the current stock price.

Many of those option contracts were set to expire on Friday, meaning handsome gains for those who bet on a further rise in GameStop's stock price.

Call options, profitable for holders if GameStop shares hit $200 (roughly Rs. 14,750) and $800 (roughly Rs. 59,000) this week, have been particularly heavily traded, the data showed. GameStop's stock traded this week as high as $184.54 (roughly Rs. 13,600) on Thursday, far below the $483 (roughly Rs. 35,630) intraday high it hit in January.

"The actors are looking to take advantage of everything they can to maximise their impact and the timing is important," said David Trainer, chief executive officer of investment research firm New Constructs. "The options expiration will contribute to their strategy on how to push the stock as much as they can and maximise their profits."

The US Securities and Exchange Commission (SEC) on Friday suspended trading in 15 companies because of "questionable trading and social media activity." GameStop was not among them.

The 15 companies were in addition to six stocks it recently suspended due to suspicious social media activity.

Robinhood said it has received inquiries from regulators about temporary trading curbs it imposed during a wild rally in shorted stocks earlier this year.

Other Reddit favorites were also lower on Friday, with cinema operator AMC Entertainment down 3.4 percent, headphone maker Koss off 22.4 percent and marijuana company Sundial Growers down 2.9 percent.

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