Social Media and the Stock Market: Trading, Price Efficiency, and Liquidity

Abstract

This study shows that a stock’s popularity on Reddit’s r/WallStreetBets (WSB) (measured by the frequency of mentions) increases trading, order imbalance, and return volatility while decreasing price efficiency. The increase in trading volume reduces order-processing and inventory costs, while the increase in order imbalance raises inventory costs of market-making. Trading and order imbalances in stocks with more frequent WSB mentions are associated with lower price impacts. The effect of order imbalance on spreads is greater than the effect of trading volume on spreads, resulting in larger spreads for stocks with more WSB mentions.

Keywords: JEL classification: G12, G14 WallStreetBets, Market microstructure, Bid-ask spread, Price impact, Adverse selection costs, Inventory risk, Order-processing costs, Vector autoregression models, Earnings announcements, Retail trades, Meme stocks

JEL Classification: G12, G14