The Tail Wagging the Dog: How Do Meme Stocks Affect Market Efficiency?
19 Pages Posted: 17 May 2021 Last revised: 23 Mar 2022
Date Written: March 22, 2022
Since the GameStop short squeeze episode, investors, regulators, and policymakers have been concerned about the impacts of social trading on financial markets. Following the unprecedented retail investors’ assault on a few “viral” stocks, known as “meme stocks,” we witnessed an unprecedented ban imposed in a small corner of the market, where Robinhood Markets Inc. restricted purchases for some meme stocks from January 28th to February 5th, 2021. Based on the lists of restricted stocks, we created two meme stock indices. We employed robust tests of market efficiency, using daily changes of our two indices and the S&P 500 index. Our results indicate that meme stock trading does not degrade market efficiency. In addition, recent lawsuits have revealed that both conventional short sellers and unconventional social traders consider themselves victims of market manipulation. Through the lens of financial economics, we investigated the rationale of these complaints. Using hourly data, we find that the trading ban destabilized meme stock markets and was also accompanied by the lower efficiency of the S&P 500.
Keywords: Market Manipulation; Meme Stocks; Short Squeeze; Social Trading; Trading Restrictions.
JEL Classification: G14; G12; G41
Suggested Citation: Suggested Citation