Alexis Christoforous and Sinan Aral of Yahoo Finance, author of The Hype Machine, discuss the role of social media in the short-squeeze frenzy.
Video transcription
[MUSIC PLAYING]
ALEXIS CHRISTOFORUS: For more information on the Robinhood GameStop saga, I’d like to bring in Sinan Aral. He is a professor at MIT and author of “The Hype Machine.” Sinan, good to have you here. You wrote a great opinion piece in “The Washington Post” – I would encourage people to check it out – about the herd mentality of social media and how it spills over into the real world like never before. What are some of the long-term implications of that, do you think?
SINAN ARAL: Well, I think what we are seeing is the rise of the power of the masses in a number of different spheres of our society at the same time. We saw it in the election, the aftermath of the election, where information streaming through social media could coordinate an uprising, a riot on the Capitol. And this was after we even got warning signs when there was a plot to kidnap and kill the Michigan governor.
Now we see crowds making another concerted effort to drive up the price of a stock. And let me be absolutely clear. I don’t mean to draw an analogy between the GameStop stock price and the Capitol riot to say there’s even anything criminal going on in the GameStop situation. It may be that nothing illegal has been done at all in the GameStop situation. But the similarity is that when information moves so quickly and so many people can coordinate so quickly, it increases the power of the crowd like we’ve never seen before. And that is the similarity between the two.
ALEXIS CHRISTOFORUS: You know, this isn’t the first time, Sinan, though, that we’ve seen social media push up stock prices a little bit, creating bubbles. We’ve seen pump and dump schemes happening on social media with misinformation and fake tweets and fake posts on Facebook. So why was the GameStop situation different?
SINAN ARAL: Well, I think a few things. So certainly in the past, when we had misinformation that was used to pump up stocks and then dump them, the SEC investigated those cases in 2017, 2013 and ’14, and actually filed charges. There were companies such as [INAUDIBLE] and Dreamworks charged by the SEC over pump and dump schemes via social media.
I think the difference here is that the large short position of several major hedge funds made it attractive to see the stock price rise dramatically. And there was this story of the David and Goliath that made the story interesting. And there was a bandwagon effect that you may not have seen with some sort of pump and dump point stocks. Or it is easy to coordinate if there is a story that appeals to the human heart and if there is a short position that is vulnerable to the very dramatic rise in a stock price. So I think that was a big difference here.
ALEXIS CHRISTOFORUS: What do you think all of this can deliver in terms of regulation? Will the answer, you think, be to place more restrictions on small investors, or will there be restrictions on all investors and perhaps different restrictions on short selling and buying on margin?
SINAN ARAL: Well, I mean, I think we need a thorough SEC investigation first. We’re actually looking at a plane crash, but the plane is still at 9,000 meters. It’s not over yet. And I saw a tweet that said I’m confused. Is it hashtag #holdtheline or hashtag #holdthebag? Because all holders cannot sell their shares at the same time. And it is very likely that the price will fall. And many people could be injured in that process.
I don’t think we should jump to conclusions and create more restrictions in a crazy way. We must start with an investigation that understands who was in this crowd. Were there any institutional investors associated with institutions? What were their views? Was wrong information disseminated during this process? Because that could potentially conflict with the SEC.
I think there are two big risks here. If you separate the prices of stocks from the underlying economic reality of companies, there is enormous potential for instability. The second major threat is manipulation. If you thought Russia thought it would be productive to interfere in our elections via social media, just imagine what they think they could do now as you can change the price results by manipulating or talking on social media.
And we know that there are automated trading algorithms associated with social media that trade based on the sentiment. So you may not even have to find someone to buy the stock. As long as it was talked about, it could trigger algorithms that would trade on the stock algorithmically.
I think in the end what we need to do is, after an investigation, we need to examine the relationship between communication about a stock and trading in that stock. We need guidelines on how to communicate in ways that maintain stability. I agreed with your last caller, your last guest, who said transparency is important. That’s probably an important part of it. But we need an investigation first.
ALEXIS CHRISTOFORUS: Sure. A lot for the SEC to consider. Sinan Aral, professor at MIT, author of “The Hype Machine,” thank you for your insights.
SINAN ARAL: Thank you.
Originally published