The Meme Stock Paradox

Abstract

This article/essay examines the recent GameStop stock trading saga that took place earlier this year. We take a somewhat different approach than the few articles that have appeared analyzing the saga. Instead of focusing on the technical regulatory aspects of the saga, we argue that the traditional rational investor models underlying the ‘fraud on the market’ theories of securities regulation are misplaced both in terms of describing the market and in terms of protecting investors. Specifically, we question whether traditional information disclosure requirements that are meant to protect investors truly protect investors, when such requirements only seem to favor large investors and shut out ordinary investors. The GameStop saga, we argue, exposes the power of decisions by large disparate investors who can create new information that otherwise wouldn’t have been created with traditional disclosure. We offer three possible approaches to understand what happened, especially in light of the fact that the stock prices of GameStop and other meme stocks continue to be much higher than where they were prior to the start of saga. These approaches are: 1) discovery through collective wisdom, 2) discovery of new tastes in stocks, 3) pride of ownership. Each of these may explain how financially underperforming companies were able to attract substantial interest from small investors, so much so that short-selling hedge-funds were ousted from the market.

Keywords: Securities, Meme Stocks, Financial Regulation

JEL Classification: G38