Retail Investors, Social Media, and the Future of Moderation
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What happened?
Earlier this year, retail investors took advantage of an opportunity to invest in stocks they collectively believed would increase in price. Using Reddit, retail investors came together on a subreddit, aptly named WallStreetBets, to parse through publicly available information and act “collectively” on certain stocks. These stocks included GameStop, AMC Entertainment, and BlackBerry Limited.
This rally was led by Keith Gill, known as Roaring Kitty on YouTube or DFV on Reddit. Prior to the ~2000% surge in GameStop’s stock price in January 2021, Gill had been posting his findings and predictions on YouTube and on Reddit. Although his predictions were initially met with criticism from other retail investors on Reddit, Gill held firm in his belief that GameStop was undervalued, especially as new game consoles were released, which would increase sales and bolster GameStop’s value. Gill’s predictions soon received validation as individuals like Michael Burry (founder of Scion Capital, the hedge fund that successfully took a position against the housing market in 2008) and Ryan Cohen (cofounder of Chewy) also noted that they had taken large stakes in GameStop.
Gill, along with a small group of likeminded investors, pointed to two factors that influenced their decision to invest in GameStop. First, they believed that the market undervalued GameStop, despite the company’s potential to turn its earnings around. Second, they had noticed that many hedge funds had taken a short position against GameStop. Armed with this information, Gill was able to create a frenzy on Reddit. As he began to post screenshots of his personal holdings in GameStop and his earnings, other investors quickly took notice.
These posts energized other investors to invest in GameStop. The stock value quickly soared as investors began pouring millions into the stock. What started as a prediction quickly became a self-fulfilling prophecy as other Reddit users posted their own profits, encouraging even more to invest, and pushing the stock price even higher. The increase in stock price was influenced in part by the hedge funds’ short positions against GameStop. As the price increased, hedge funds were forced to either double down on their positions or buy the stock at a higher price, thereby creating a short squeeze.
Over the course of a few weeks, GameStop’s share price jumped from ~$18 to ~$483. Large institutional investors who had shorted the stock were on notice. However, it soon became clear that this situation was not isolated to Reddit. The government quickly took notice and even asked Gill to appear in front of Congress to explain his actions. This was followed by an SEC investigation into social media posts to look for signs of fraud.
Why now?
Although individuals have engaged in risky speculative trading throughout history, the GameStop incident represents one of the most noteworthy and accessible speculations in recent history. This was due in part to the prevalence of social media platforms like Reddit, which allowed investors to post updates on an almost minute-by-minute basis, disperse information as fast as it was coming in, and allowed others to comment on their posts. The ability to communicate with others in a post’s comment section created a quasi-sense of community amongst Redditors who were determined to take advantage of the situation at hand. Guy Warren, CEO of FinTech ITRS Group noted, “Until now, retail trading activity has never been able to move the market one way or another. However, following the successful coordination by a large group of traders, the power dynamic has shifted; exposing the vulnerability of the market as well as the weaknesses in firms’ trading systems.”
However, social media alone was not responsible for the rise of retail investors. No-fee trading platforms like Robinhood lowered the barrier of entry for investors. Using platforms like Robinhood, retail investors can create accounts and begin trading almost immediately. Unlike “traditional” trading platforms, Robinhood does not charge users a fee for each stock bought or sold. Moreover, with platforms like Robinhood being available to users via app stores, investors can monitor their own investments and make trades within a matter of minutes.
When you pair social media and its ability to disseminate information at the touch of a button with trading platforms that allow you to act on that information within minutes, it becomes clear how quickly retail investors can cause volatility. The rise and popularity of these elements is what allowed an ordinary speculation to create a frenzy within the market. Within months, investors were able to walk away with billions from their positions in GameStop, with retail investors fairing just as well. However, not all investors won. A significant number of investors bought into GameStop at a higher price hoping that the price would continue increasing. Unfortunately, the volatile investing and market conditions made GameStop a bubble, and investors lost millions.
What does the future hold?
Although Gill was called to testify in front of Congress, he maintained that he had no intention of influencing the price of GameStop. First, he claimed that the increase in GameStop’s stock price was just an indication that his prediction was correct. He noted that he invested in the stock because he “like[d] the stock.” Second, Gill explained how social media platforms were leveling the playing field. He posited that conversations of company fundamentals that take place over social media are no different than those that take place in person.
However, some have posited that Gill may have engaged in a form of market manipulation. Although it is unclear whether Gill has committed criminal market manipulation, there are numerous ongoing civil suits against Gill, alleging, among other things, that Gill organized a social media campaign to manipulate GameStop’s stock price.
Despite the ongoing investigations, one thing is clear: what started off as a group of retail investors communicating on Reddit turned into an international phenomenon, with investors from all over the world frantically exchanging GameStop shares. While some benefitted from the increase in stock price, many others suffered significant losses due to the volatility of the stock and the market as a whole. This has sparked debate on the new role that social media plays in financial markets. While some have pushed for increased regulations, others argue that these social media interactions are akin to conversations that may happen between wealthy investors in casual settings, such as on a golf course.
Social media platforms have generally benefited from the protections of Section 230 of the Communications Decency Act. Section 230 generally protects social media companies against liability for user activity. The legal shield that Section 230 provides is once again under fire after the GameStop frenzy. Critics argue that Section 230 gives too much wiggle room to social media companies as they have freedom to “decide what can stay on their platforms and what must come down”. Critics further hold that “lack of closer scrutiny on the matter has left open the opportunity for potential manipulation” by social media users. They argue that holding social media platforms liable for user activity will incentivize companies to take a more aggressive stance on moderation, inevitably reducing the threat of potential market manipulation.
However, others have argued that insofar as there was not any illegal activity happening on these sites, there is no reason to increase content regulation. Supporters of Section 230 argue that without these protections in place, these platforms would not have been able to “grow into the wild-west of free speech that they are.” Supporters have also argued that even if there is evidence of illegal activity on these platforms in relation to trading, “regulators already have the tools that they need to penalize bad actors for engaging in that kind of securities fraud.”
The moderation can come from one of two places: government agencies or social media platforms themselves. It is unlikely that the government would engage in a significant campaign to moderate social media posts for two reasons. First, there is just too much user activity to make governmental oversight feasible. Second, social media moderation by the government may create Constitutional concerns.
However, if lawmakers decided to roll back the protections afforded by Section 230, social media platforms would have to engage in significant moderation. Rolling back these protections would create significant liability for social media platforms because they would be responsible for all user activity. This would most likely lead to the downfall of platforms like Reddit, where moderation is done by community members, or overly aggressive moderation practices by conglomerates like Facebook and Twitter.
Despite the potential for abuse, large scale social media regulation does not have a place in today’s day and age. If ongoing investigations conclude that social media platforms can be used to engage in market manipulation, the solution lies in imposing regulations onto social media companies as opposed to peeling back the protections of Section 230. For example, the government could require social media platforms to monitor user activity regarding certain stocks. If a company finds that there is an increase in user activity relating to a stock and a material change in the stock’s price, the company can implement a “slow down” to limit the amount of published user activity targeted at a certain stock. This “slow down” would allow the company to effectively parse through the information, flagging and reporting potentially damaging content before the information is published on the platform. The proposed solution would allow social media companies to help regulate potentially damaging user activity while still allowing other content to proceed without heavy moderation.
As of this year, 72% of American adults use at least one social media platform. Engaging in stricter moderation would significantly impact the information that many users have access to. Even if moderation was tailored to certain types of content (e.g. content relating to financial markets), the impact would be a significant reduction in sharing of publicly available information.
Furthermore, increasing regulation could further exasperate political divides as it could allow social media companies to actively moderate content they do not agree with, while claiming that such moderation is meant to limit potential liability. For example, if Section 230 were repealed, platforms like Twitter could begin moderating conservative views and claim that they are taking those actions to protect against liability, when in reality, the decision may stem from the company’s political stance. The Trump Administration was infamous for accusing companies like Google for bias against Republicans and conservatives. Moreover, it would also limit the potential benefits that unmoderated platforms bring with regard to these political issues. Over the past few years, social media has been an invaluable tool for spreading information and garnering support for various types of social activism. Incentivizing social media platforms to engage in harsher moderation could greatly limit its most valuable consequences.
About the Author: Armaan K Bhimani is currently a 2L at Cornell Law School who finds the intersection of law and finance fascinating. He grew up in Houston, TX and holds a Bachelor of Business Administration in Finance from the University of Houston. During his 1L summer, Armaan was a Summer Associate at Baker Botts LLP in Houston, and he is currently an associate on the Cornell Journal of Law and Public Policy.
Suggested Citation: Armaan Bhimani, Retail Investors, Social Media, and the Future of Moderation, Cornell J.L. & Pub. Pol’y, The Issue Spotter, (October 18, 2021), https://live-journal-of-law-and-public-policy.pantheonsite.io/?p=3761.