The World Ahead 2022
The phenomenon of meme stocks could be here to stay
Small-scale traders’ sheer force of will can keep stock prices pumped up
HYENAS, VULTURES, lions and wildebeest featured in January 2021 in an imaginative description by Thomas Friedman, an American commentator, of the feeding frenzy over a handful of American stocks. Referring to GameStop, a consumer-electronics retailer at the centre of the frenzy, Mr Friedman said the stock would eventually go back to four to five dollars. “It’s the circle of life.”
GameStop shares have not returned to the four or five dollars at which they traded in the summer of 2020. They currently trade at over $180 even as the company is still making a loss. But although Mr Friedman’s metaphor may have lacked ecological rigour, it typified a popular, naturalist way of viewing financial markets. There are winners and losers, growth and decay—which come to an equilibrium over time. That view took a serious beating in 2021, and it is likely to continue to struggle in 2022.
Conventional analysis gives few explanations for such a sustained rise in a small handful of stocks such as GameStop—known as meme stocks, based on their sudden popularity on social media—whose ascent flies in the face of fundamentals or asset prices. Analysts have thus reasoned that what goes up must come down.
Predictably, conventional finance has tried to muscle in
This dovetails with the difficulty regulators have had in dealing with meme stocks. Research by Victoria Chui and Moin A. Yahya of the University of Alberta Faculty of Law notes that these events are neither an example of “pump and dump”, in which the shares of a firm are boosted then sold quickly, nor a cybersmear scheme in which a short-seller publishes malicious rumours about a company. Instead, it is a “pump and hold”—an action that sits a long way outside existing frameworks of market behaviour.
Much ink has been spilled over why the buying of meme stocks began: the fruit of a righteous rebellion against Wall Street short-sellers, perhaps, or simply the result of too much disposable income and time during lockdown. But that matters less than the fact that it did happen and that it has been shown to work, even if in just a handful of cases.
Robinhood, the platform of choice for many small-scale traders, has struggled since its IPO in August, but similar apps that turn trading into a game are popping up across the world and will be difficult to stop. The phenomenon is likely to continue and even intensify in 2022.
Predictably, conventional finance has tried to muscle in. An exchange-traded fund designed by Roundhill Investments, an advisory firm, based on an index of meme stocks, awaits regulatory approval. In cryptocurrency markets, the arrival of mainstream finance cemented the sector as more than a fad. The same may soon be true of meme stocks.
In May South Korea lifted a short-selling ban imposed in the early days of the pandemic. Large short positions mounted against HMM, a container-transport company, and Doosan Heavy, an industrial firm, which were spurned in turn by the country’s “ants”, a term for small-scale investors. The ants will be strengthened in 2022 as fractional trading of Korean stocks begins. (Some trade at such high prices that individual trading is difficult.)
As long as stocks can be pumped up and held by the sheer force of will of small-scale traders, the old thinking may no longer be a safe bet. Ants are also part of the circle of life.
Mike Bird: Asia business and finance editor, The Economist, Hong Kong■
This article appeared in the Finance section of the print edition of The World Ahead 2022 under the headline “The circle of life”