TECH TUESDAY is a weekly content series covering all aspects of capital markets technology. TECH TUESDAY is produced in collaboration with Nasdaq.
The social media-driven meme stock craze of 2021 that resulted in breathtaking volatility in a handful of other stocks had another effect: catching the attention of market surveillance practitioners.
GameStop Corp. rose from about $3 per share in mid-December 2020, to as high as $120 in late January 2021, before falling back to $10 within a few weeks on essentially no fundamental news. Shares of AMC Entertainment and Bed Bath & Beyond saw similar swings. The meme stock moves originated from retail investors who discussed the securities on Reddit and other social media platforms.
The U.S. Securities and Exchange Commission (SEC) reviewed the market activity but has only recommended additional study of market structure and its regulatory framework to date – there were no cited violations or charges filed.
People have discussed stocks on social media for as long as social media has existed, dating back to the 1990s. “We always knew it was out there, but we never saw the extent that people could band together and move prices,” said Randy Genau, Head of Market Surveillance, U.S. at Nasdaq. Meme stocks “changed the way we look at this.”
Speaking on the recent webinar entitled The Influence of Social Media on Financial Markets, Genau noted that meme stocks “showed that social media can enable people to get together and go head-to-head with the biggest financial institutions, which was empowering for everyday investors.”
Genau added: “But when people, money and greed come together, it can be good or bad. It’s our job to figure out who the bad actors are and how to root them out.”
Tony Sio, Head of Regulatory Strategy and Innovation at Nasdaq, said that retail trading now comprises about 23% of U.S. stock trading volume, up from the low- to mid-teens several years ago, prior to the COVID-19 pandemic. That has brought with it an increase in high-risk behavior in the markets, which needs to be monitored, Sio remarked.
There are two use cases in the surveillance of social media. In real-time, surveillance tools assess the volume of activity, as well as its sentiment, which can point to manipulative behavior as it happens. And then, after the fact, social media can be combed through to gather evidence about possible wrongdoing.
Genau noted that Nasdaq has close to 5,000 listed issues – trading which needs to be monitored between 4 am and 8 pm New York time every day. “If we see volatility introduced into a market, we pay attention to how social media activity relates to what we’re seeing, as the two tend to coexist.”
In Europe, Nasdaq’s surveillance team monitors trading venues in Iceland, Denmark, Finland and Sweden, according to Gustav Liljekvist, Head of Market Surveillance, Europe at Nasdaq.
“It used to be a reactive approach where we looked at social media to get an understanding of price information,” Liljekvist said. “Now, we have a third-party solution where we feed social media into our system, which gives a unique opportunity to be proactive and engage. That is the real-time part of it; then we also do deep-dive investigations with multiple (social media) channels.”
Why monitor social media? “Integrity and trust are fundamental to any market, for investors to feel comfortable investing and for issuers to raise capital,” said Liljekvist. “If we harm integrity or trust, we have a lack of confidence in the market, which creates a risk premium and costs. It is extremely important that we do our best to keep a high level of confidence.”
To replay the webinar, click here.
Creating tomorrow’s markets today. Find out more about Nasdaq’s offerings to drive your business forward here.
