Social media has changed the stock market game. Why regulators are paying attention

Click to play video: 'How social media is impacting the stock market'
How social media is impacting the stock market
More than ever, people are turning to social media for guidance when it comes to investing. Business correspondent Anne Gaviola breaks down this phenomenon – Jan 25, 2022

When Rory Nicol ploughed nearly $2,000 into meme stocks during the pandemic, he wasn’t just picking stocks for the first time in his life. The 44-year-old Cambridge, Ont. resident felt like he was part of a passionate online movement, doing something historic.

“I got caught in the hype. Not only was it a way to make money but it felt like there was a community coming together,” he tells Global News. “It was really exciting.”

Rory Nicol was drawn into the historic short squeeze of 2021 by online discussion forums and social media hype
Rory Nicol was drawn into the historic short squeeze of 2021 by online discussion forums and social media hype. Photo supplied

Nicol is referring to the meme stock frenzy that created an unprecedented short squeeze early last year that put several hedge funds out of business and forced many established financial firms to nurse billions in losses. Despite the actions of a small but mighty army of retail investors coordinating online through Reddit, many “do-it-yourself” investors like Nicol also lost money.

Story continues below advertisement

Thirty-seven meme stocks including GameStop and AMC, tracked by Bloomberg are currently trading at about 40 per cent of their peak price in January 2021.

Waterloo, Ont. resident Jeff Gadway is, by his own admission, a fairly seasoned stock investor but even he couldn’t resist participating in the meme stock frenzy.

“I put some money into GameStop. It was nothing more than I was completely prepared to lose, just like going to a casino,” he tells Global News. He says he did his research on the companies offline and considered the buzz on Twitter and Reddit a red flag.

“It was a way for me to learn a little bit more about the dynamics of a short squeeze as well as this herd mentality,” he says.

Jeff Gadway invested in meme stocks as an experiment. Photo supplied

By banding together on social media and putting their dollars to work in the real world, the so-called “Reddit army” of do-it-yourself investors purchased shares of companies that were being shorted, or bet against, by major hedge funds.

Story continues below advertisement

This pushed the price of companies such as GameStop, AMC and BlackBerry higher forcing some of the hedge funds to exit their positions, which in turn propelled stock prices higher at an even faster rate.

The combination of new buyers and panicked sellers drove the price of these equities to unprecedented heights in a very short time.

Nicol and Gadway are part of an explosive cohort of retail investors, many of them new, who turned to stock trading for entertainment as well as financial gain during the COVID-19 pandemic. An Ontario Securities Commission study suggests nearly half of investors were actively buying and selling during the pandemic, particularly men and younger Canadians.

That shift in investing behaviour brought a change in how stocks are discussed online and, ultimately, how they are influenced by conversations happening on social media platforms such as Facebook, Reddit and Twitter, market analysts say.

This has prompted regulators across the country to try new tactics to be part of those online conversations to raise awareness about the importance of due diligence and the risks inherent in investing in equities.

Click to play video: 'Influenced: Can you trust financial advice on social media?'
Influenced: Can you trust financial advice on social media?

The social media effect on stock markets

According to a British Columbia Securities Commission survey, shared exclusively with Global News, 36 per cent of respondents say they use social media or online discussion boards at least once a week to get investing information. Facebook is the fourth most popular source after online news articles, TV and radio, the study found.

Story continues below advertisement

There’s a generational divide based on the BCSC data. Millennial and Gen Z respondents between the ages of 18 and 34 are nearly twice as likely (32 per cent) to have purchased or considered an investment they found out about on social media compared with 18 per cent of respondents aged 35 to 54.

Greg Taylor, chief investment officer with Toronto-based asset management firm Purpose Investments says the pandemic brought with it “the return of the cult of equities” and large numbers of people suddenly becoming very interested in stocks.

“During lockdowns, with no sports to watch, flush with cash, people turned back to the stock market,” he tells Global News. “What changed is that social media brought people back and made them feel like they were actually on par with a lot of the Wall Street experts, and that really leveled the playing field.”

Taylor says day traders now have to monitor what’s happening on social media to keep up with the latest stock market buzz, along with following traditional media and using tools such as Bloomberg terminals.

“Twitter’s done a really good job of democratizing the news flow and there’s a lot of people who follow different influencers,” says Taylor. “But social media is something that is going to have to come to the forefront of regulation. That’s really going to be a struggle for governments and regulators because right now it is the Wild West.”

Story continues below advertisement

Securities regulators are increasingly including social media and online platforms in their outreach and education strategies. The Ontario Securities Commission (OSC) recently concluded a pilot project that involved a presence on Reddit. Clearly identified as the OSC, members joined discussions about stocks on subreddits including Bay Street Bets, to remind participants of risks.

OSC chair and CEO Grant Vingoe says many participants in online forums discussing stocks and cryptocurrency are “fundamental believers” leading to the creation of digital echo chambers.

“It’s very similar to what we’ve seen in social media generally. There’s a tendency for it to reflect your own existing opinions when you search out a particular group or forum, rather than a variety of opinions,” Vingoe tells Global News. “That can be dangerous for investing because it doesn’t incorporate the necessary skepticism.”

Story continues below advertisement
Click to play video: 'Influenced: Should Ottawa regulate social media?'
Influenced: Should Ottawa regulate social media?

The BCSC’s online strategy includes a fraud awareness campaign on Reddit, starting in March and it has already been present on new digital platforms including Craigslist and Kijiji.

Pamela McDonald, the director of communications and education with the BCSC, tells Global News this outreach takes aim at fraudulent investment offers and seeks to help millennial and Gen Z investors primarily.

“That’s where younger investors, 18 to 34, are going to get investment information and acting on it so we want to go into that space and speak to them in a way that is relevant to them and will help develop good investing habits over the course of their lives,” she says.

McDonald says the BCSC is also targeting influencers, or online forum participants who don’t disclose their affiliation with a company they’re promoting. This includes people who work for the company or own shares in a security they’re pumping.

Story continues below advertisement

She says the social media factor as it relates to discussions about stocks and other investments may “seem like a small phenomenon right now,” but it is an “important trend to watch as more platforms surface.”

Lessons learned from the meme stock craze

Among the lessons Gadway said he learned from this historic pile-on: a Reddit army can be victorious over an established financial player, in the short-term.

“Institutional investors have so much at stake that they’re really able to hold on a lot longer than a lot of the retail investors maybe think they could,” says Gadway.

“So you really need to be careful about going into those types of opportunities head-first.”

Story continues below advertisement

Meanwhile, Nicol says his “stock talk” these days happens with friends that he knows, and trusts. Not the mostly anonymous online community that was his baptism by fire into the world of stock-picking.

“It was a good reminder not to believe everything I read, to be really careful, to really research,” he says. “Over the last year, I’ve been spending a lot more time with stocks and I have some friends who trade regularly, and they’ve been helping me and teaching me a lot of things. So I’m learning that game.”

The only meme stock that he currently still holds is BlackBerry. He cites a “nostalgia factor” because the company is a local success story and he says he loves the brand. But he says he’ll never forget the experience he had, helped by social media and other rabid online forums, with the short squeeze.

Nicol says he’s grateful he got to share in an experience during an unprecedented downturn, with people online who felt that the Great Recession had left average investors much worse off while Wall Street financiers got off scot-free.

“I saw this on Reddit, on the Subreddit. A lot of people said ‘this is wonderful. I’m making money now. I lost my house in 2008,’ he says. “And this was like giving it back to them.”

Sponsored content