Meme Investors and Retail Risk
60 Pages Posted: 14 Jan 2022 Last revised: 2 Nov 2022
Date Written: September 30, 2021
Dramatic trading in GameStop, AMC, and other “meme stocks” in early 2021 reignited debates about how efficient the stock market is, its purposes, and whose interests it should serve. Although understanding meme and retail trading is critical to evaluating responses to these recent trading episodes, rigorous study is still needed. This Article joins the call to thoroughly analyze the changing role of retail investors and their interaction with information, price discovery, and stock markets. First, this Article evaluates meme investing trends to frame important insights into broader retail investing patterns. Rather than engaging in idiosyncratic trades that cancel each other out in aggregate, this Article demonstrates that today’s retail trades are increasingly sticky and may predict future stock price movements. Second, this Article reengages and updates the theoretical understanding of the interaction between retail investors and market prices. A careful evaluation of today’s retail trading behavior and its effects on market prices leads to this Article’s central insight: the influx of retail investors—either intentionally or unintentionally coordinated in their trading—introduces coordinated retail risk. This overlooked form of risk arises due to the growing potential for retail trades to impact or predict future price movements, irrespective of the information content of those trades. By categorizing retail investors as coordinated uninformed retail investors, coordinated informed retail investors, and coordinated meme investors, and evaluating responses by other market participants, this Article illuminates the harms and benefits of today’s retail trading, details its impact on market efficiency, and clarifies the need for regulatory responses.
Keywords: retail investors, trading, meme, gamestop, microstructure, securities
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