There is evidence that at least some of the recent social-media-driven “meme” trading in stocks such as GameStop is being driven by motives other than profit seeking. In fact, many of the retail traders involved in the recent short-squeeze frenzy have stated publicly that they are buying and holding their positions as a form of social, political, or aesthetic expression.

Retail securities traders are typically classified as either investors or speculators. Investors research a stock’s fundamentals and buy it with the expectation that it will perform well over time. Speculators are less concerned with a stock’s fundamentals than its potential for volatility in price (up or down). A speculator looks to anticipate how other traders in a stock will react to price movements or market events and trade accordingly. While an investor typically buys stock to hold it long term, the speculator may enter and exit the same position in a single trading session. Though they employ different strategies, the principal goal for both is to profit from their trading.

The recent meme-trading phenomenon, however, suggests that a new category of retail trader has emerged: the “expressive trader.” An expressive trader does not trade for profit but rather to send a political message or produce a social or aesthetic effect. Social media has made expressive trading practicable for retail market participants by allowing a large number of small investors to coordinate their trading in real time to deliver their desired message in the form of a measurable impact on the targeted stock’s price.

One consistent theme for expressive traders in GameStop has been to protest the Wall Street elitism that motivated the Occupy Wall Street movement in 2011. In contrast to that movement, however, expressive trading has had very real economic consequences for the movement’s perceived hedge-fund villains.

Of course, expressive trading comes at a price. Expressive traders know the price movement they generate does not reflect a stock’s fundamentals and that they may incur losses when the probable correction takes place, but they consider the act of sending the message to be worth the cost. Indeed, many GameStop traders have demonstrated just such an attitude. As one commentator notes, GameStop retail traders frequently quote Heath Ledger’s Joker character from “The Dark Knight” on their trade-related posts: “It’s not about the money; it’s about sending a message.”[1] Or as another commentator points out, “some investors have publicly said that as long as they can hurt the hedge funds, and hurt the system, that is a benefit to them; they don’t care if they hurt themselves.”[2]

The principal GameStop-related message may be anti-hedge-fund-driven short selling, but future expressive trading may protest companies’ labor practices, lack of board diversity, controversial products, advertising, etc. As one Washington Post opinion author suggests, “[i]f a corporation’s stock plummeted 20-30 percent in a single day, that would send a clear and resounding message to its board of directors, principal shareholders, and senior leadership team, i.e., the decision makers.”[3] With all this in mind, we should expect more expressive trading in the future, and this

raises a number of important questions. For example, how does the phenomenon of expressive trading implicate our received understanding of market functioning and the government’s regulatory role?

Historically, the efficient market hypothesis (EMH) has offered a background assumption for many traders and regulators alike. The basic idea is that, in an efficient market, securities prices at any given moment will reflect all available information about the issuer and broader market.[4] If we assume that at least some of the recent price movement in stocks such as GameStop is driven by expressive trading (e.g., to make a political statement), however, this may offer a counter-example to the EMH. Of course, there have been numerous market bubbles in the past (typically driven by over-exuberance and FOMO), but price movements driven by expressive trading are principled and therefore different. Should the EMH be modified or supplemented to account for the phenomenon of expressive trading?

How should market regulators react to expressive trading? Extreme volatility in stocks like GameStop led many commentators and politicians to call for market intervention or new regulations to protect investors. If, however, some of this volatility is driven by expressive traders who are knowingly trading with disposable income to make a political, social, or other point, then trading restrictions would not protect these traders but censor them. Censorship of expressive trading may be justified in some instances, but the broader implications of any such regulatory action should be carefully explored in advance.

ENDNOTES

[1] Matt Phillips, Short squeeze: What exactly is going on at GameStop, The Irish Times (Jan. 29, 2021), available at https://www.irishtimes.com/business/markets/short-squeeze-what-exactly-is-going-on-at-gamestop-1.4470952.

[2] See Squawk Box, Robinhood CEO on what he thinks is motivating the GameStop short squeeze, CNBC (Jan. 29, 2021), available at https://www.cnbc.com/video/2021/01/29/robinhood-ceo-gamestop-reddit-short-squeeze-motivation.html.

[3] Amber Petrovich, Opinion: Why we cannot and will not stop with GameStop, The Washington Post (Jan. 29, 2021), available at https://www.washingtonpost.com/opinions/the-gamestop-movement-shouldnt-stop-there-use-that-power-for-social-good/2021/01/29/f11a36a8-6266-11eb-9430-e7c77b5b0297_story.html.

[4] See, e.g., Eugene F. Fama, Efficient Capital Markets: A Review of Theory and Empirical Work, 25 J. Fin. 383 (1970).

This post comes to us from John P. Anderson, the J. Will Young Professor of Law at Mississippi College School of Law. It is based on his forthcoming article, written with Jeremy Kidd and George Mocsary, “Social Media, Securities Markets, and the Phenomenon of Expressive Trading.”