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Not all meme stocks are created equal, in fact some meme stocks might just be the result of a dark experiment with the market power of retail investor FOMO.
Rumors of bad actors leveraging the power of Reddit by subverting its rules to create pump and dumps on individual stocks have swirled for months, but now people inside the situation are sounding the alarm that the threat is very real. Those insiders point to a spate of meme stocks in recent weeks that have surged and then flamed out in only matter of hours, seemingly driven only by what appears to be their sudden but short-lived popularity on Reddit boards.
“We’re seeing big variations in posts and comments on Reddit,” cautioned Travis Rehl, the founder of HypeEquity, a platform that tracks social media sentiment on individual stocks. “These bad actors are getting more sophisticated.”
Unlike January’s meme stock supernova that birthed the GameStop
GME,
and AMC Entertainment
AMC,
wild short squeezes, some of these new instant memes did not pop after any actual news and some are not even that heavily shorted.
In fact, the only thing they had in common was a sudden surge in mentions on social media, a statistic that has been increasingly compiled by analysts like Rehl who are selling it as investment data on new platforms and which are now being quoted in analysis of meme stocks by major Wall Street firms which, in turn, are clearly now aware of how social media fuels the market for meme stocks.
In recent weeks, Clover Health
CLOV,
and ContextLogic
WISH,
have surged in popularity on both Reddit and the markets, joining the ranks of GameStop, AMC Entertainment and BlackBerry
BB,
on the unofficial Meme Index. But many other stocks popped fast without sticking around very long. Petco
WOOF,
Tattooed Chef
TTCF,
Vizio , and Brazilian bank Itaú Unibanco
ITUB,
all posted gains in short periods of time in the last two weeks, and all did so thanks in large part to sudden five-digit spikes in volume of mentions on WallStreetBets alone.
“
“The stock goes up and the comments stop almost immediately.”
”
Take for instance June 14, when shares of Petco closed up almost 17.9%.
That was a Monday and the day’s big Petco news was that it would be presenting virtually at the Evercore ISI Consumer & Retail Summit the following day. But the better explanation for Petco’s pop was HypeEquity data that showed the pet superstore’s stock social media volume had increased 43,433% over the weekend.
On June 15th, interest in Petco faded on Reddit. The stock fell 18.5%.
Vizio made a similar trip for very similar reasons the following day.
“No conversation at all, then a flood of mentions,” said Rehl, outlining the pattern. “The stock goes up and the comments stop almost immediately.”
These cases have caught the eye of other data platforms that track Reddit mentions of individual stocks.
“Please be extra cautious with Reddit meme stocks,” the official Twitter account of data platform Docoh posted midday lastWednesday. “Traffic to our Reddit dashboard has increased 5x this month, and there’s almost certainly manipulation happening on Reddit by nefarious actors due to increased interest and potential returns for pumps and dumps.”
Giving some oxygen to Docoh’s concern is that the posts are often carbon copies of text across different boards posing as unique insight, or “DD”s as Redditors call them, an acronym for “due diligence” or detailed arguments on a new stock idea that retail investors might have missed. “DD’s” have been responsible for many of the meme stock success stories so far.
But these posts also appear to be in violation of WallStreetBets rules for posting.
In addition to to major bylaws like “No paper trading,” a ban on “Political bullshit, “No penny stocks or SPACs,” and “No cryptocurrency,” WallStreetBets also has rules like “No pump & dumps” and “No market manipulation.”
In an effort to curb those possible infractions, users can only post on the board if their account is older than 45 days and made their first post more than 30 days ago. The board’s moderators also have requirements for “Karma” on those accounts, a metric that Reddit uses to tracks engagement with other users and judge a profile’s relative popularity on the site.
But Rehl says the invading memefluencers have found new tricks.
“There are new accounts with suspicious creation dates and old accounts suddenly posting about stocks that no one was talking about a minute ago,” he said. “And we’re seeing things like 5 posts in 3 seconds by the same user and it’s the same post over and over.”
This new fake meme threat has not gone unnoticed by many inside Reddit’s retail trading scene.
In a post on Wednesday morning last week that has since been deleted by moderators, Reddit user bbxmiz cautioned their fellow users on WallStreetBets that “This sub is being used to orchestrate pump and dumps”, citing Petco stock after a rash of similar DDs made their rounds on WallStreetBets leading up to the rally.
“
“It’s market manipulation, pretty clearly”
”
Docoh founder Dan Zambonini has seen social media volume tracking go from a lightly-followed metric in April and May to his most popular data set be far in June.
“It’s the #1 most popular page on our site,” Zambonini wrote in a direct message. “So there’s a huge audience out there that’s primed and ready to be taken advantage of.”
And one legal expert says that’s where things might get really interesting.
“It’s market manipulation, pretty clearly” said Francis Curran, a securities litigation attorney at Kudman Trachten Aloe & Posner. “Even if it’s not a classic pump and dump, these are real people buying these stocks, and they’re left holding the bag when the price falls out. ”
And market manipulation is something very much on the minds of regulators when it comes to meme stocks these days.
On June 7, the Securities and Exchange Commission released a statement making it clear that “SEC staff continues to monitor the market in light of the ongoing volatility in certain stocks to determine if there have been any disruptions of the market, manipulative trading, or other misconduct.”
Two days later, GameStop disclosed it had received a request from the SEC to voluntary hand over documents and other information as part of an agency investigation into “the trading activity in our securities and the securities of other companies.”
If that investigation will include possible pump & dump schemes being orchestrated by bad actors on WallStreetBets, Curran says that the SEC will be very interested in one thing.
“If there is evidence to be found, it would ultimately have to come from metadata that shows where these things are coming from,” he mused. “And that data would have to come from Reddit.”
For it’s part, Reddit has maintained throughout the meme stock trading cycle that it has seen no evidence of any laws being broken on its platform. When asked if Reddit would cooperate with any potential SEC probe into the company’s data, a Reddit spokesperson told MarketWatch “We will review and cooperate with valid law enforcement investigations or actions as needed.”
But the first line of defense is retail investors, and some of them already seem eager to approach these unwanted visitors with a plan of their own.
“I’ve definitely capitalized on short term gains because I realize that 90% of the time now, when some ticker randomly appears on this sub…it’s a pump and dump situation,” cheeseboardwhitegirl wrote in reply to the deleted warning post on WallStreetBets. “And if I can get in early…I benefit.”
“If you recognize what’s going on and can take gains, do it.”
