Is Reddit Manipulating the Market?
In the past two weeks, multiple small-cap stocks have seen significant volatility, whose main catalyst is r/WallStreetBets. r/WallStreetBets, which I will now refer to as Reddit, has made similar manipulations in the market in the past—most notably GameStop. They noticed a massive volume of shorts from institutional investors and decided to pump the stock, which rose from $20 to $400 in a month.
This past two weeks have been focused on three different stocks: $OPEN (real estate technology), $KSS (Kohl's), and $DNUT (Krispy Kreme Inc).
Before we get into the nuance, I do need to preface that the $OPEN situation is slightly different. A popular investor, Eric Jackson, founder of EMJ Capital, gave reason to believe $OPEN (a real estate tech company) was undervalued, which opened the door for Reddit to ‘ride’ the hype.
Reddit can be seen as the contrarians, sympathizers with Occupy Wall Street, and arguably, their biggest characteristic: degenerate gamblers. This is why situations such as $OPEN, $KSS, and $DNUT occur. They will seek out stocks that are being shorted and give a big F-you to the old man by forcing them to cover their losses—which only drives the price higher.
But at what point does this “vendetta” turn from a personal strife to mass strategy, which can amount to group manipulation? Some in the Ockham's Razor group view these people on Reddit as independent actors with no real power—simply the degenerate gamblers described earlier. Others see this repeat pattern of “manipulation” and can assign agency to this cause, whether good or bad.
After subjecting myself to many hours of Reddit media, I have come to believe there is a form of group manipulation, but I need to qualify that statement and say it's very disorganized—or maybe I’m illiterate in their language (it is a subset of English, I think). Every day, multiple stocks are promoted—some with a call to arms, others with just a ticker, and others with a theory of why to invest in a stock. Deep down, it comes off as if they would like to all ride the same stock, and yet even they cannot decipher themselves. Questions about what stock they are riding that day—what’s in and what’s out—fill the feed.
A perfect synopsis of Reddit can be gathered by a comment in a discussion on their subpage that can be summarized as: "Invest in $DNUT because there is NUT in the ticker." And yet, occasionally, a perfect storm is created where everything clicks. This is what we saw during $GME. I believe that is a case where we can point to and say yes—they manipulated the market. They were the catalyst that began a movement that went beyond them.
Some words carry unfair baggage based on the context in which they are generally used. Typically, manipulation has a stigma that is viewed as unfair, and yet I do not believe manipulation, in the sense I am using it, should be seen as such. I gravitate toward Milton Friedman and the Efficient Market Hypothesis, which, summed up, means the markets—although not perfect—are the best representation of all known information and therefore are technically in equilibrium regardless of external intervention.
At the end of the day, Reddit might just be a bunch of degenerate gamblers, but as the sang goes a broken clock is right twice a day.
