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

Abstract

Using 2020-2021 data from social media platform Reddit, we examine connections among stock
prices, retail trading, short-selling and social media activity. Higher Reddit traffic, more positive
tone, and higher Reddit connectedness predict higher returns, greater and more positive retail order
flow, and lower shorting flows the next day. Social media information content is distinct from
retail order and shorting information content. Higher Reddit traffic, more positive tone, more
disagreement and higher Reddit connectedness increase shorting flow’s information content.
Robinhood 50 stocks are more affected by social media activity, with stronger links among retail
order flow, shorting flows and future returns.

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

JEL Classification: G11, G12, G14, G23