The Rise of Reddit: How Social Media Affects Retail Investors and Short-sellers’ Roles in Price Discovery

Abstract

Using data from social media platform Reddit from 2020 and 2021, we examine how stock prices, retail trading and short-selling are inter-connected with social media activity. More Reddit traffic, more positive tones, more disagreement and higher connectedness at Reddit lead to higher returns, higher retail order flow, and lower shorting flows on the next trading day. The information content of the social activity variables is different from that of retail order flows and shorting flows, and they are each a significant predictor for future returns. Interestingly, when there is higher traffic, more positive tone, more disagreement and higher connectedness on Reddit, the shorting flows become even more informative and predict even lower future returns. A closer look at Robinhood 50 stocks shows that these stocks are more affected by social media activity. Positive retail order flows predict even higher future returns for these stocks, while heavy shorting flows in these stocks also more significantly predict low future returns.

Keywords: social media, short selling, intraday trading, retail investors

JEL Classification: G11, G12, G14, G23