Coordinating themselves on a social, a few individual investors decide to buy the shares of a company in crisis at the same time, causing the price to rise due to high demand. The traders who had instead 'bet' on what appeared to be an inevitable fall in the share price of a company in bad waters are forced to react to that strategy, buying in turn, and triggering a further vertiginous rise in price. This is what is called in technical jargon a 'short squeeze'. One of the most striking events occurred - exactly in the terms just described - in 2021 in the case of Gamestop, a chain of video game and accessories shops, whose shares had been quoted at $17 per share at the beginning of the year and had skyrocketed to almost $500 after a group of investors agreed on the social media site Reddit to start buying them at the same time.
Also recounted in films and TV series, the story has brought to the attention of the general public a phenomenon known mostly to insiders: the ability of an online community - made up of retail investors, i.e. individual investors with limited capital - to organise itself through social media to the point of strongly influencing the dynamics of the economy and shaking the financial markets.
"In recent years there has been a revolution in access to trading," explains Luigi Longo, a former PhD student at the IMT School and now a researcher at the European Commission. "There are now applications that allow investors with very limited capital to enter the market, without imposing high fees or minimum investment thresholds. This is precisely why it is necessary to monitor and regulate these phenomena, so that the markets are not taken by surprise, with the risks that this entails'.
The influence of these investors, also called 'noise traders', on the market has always been considered marginal compared to that of large institutional investors such as banks and investment funds. But this image of the small investor as a passive spectator of market dynamics is now outdated: the Gamestop case has suggested that, if coordinated, retail investors can move the market, with significant impact.
Precisely in order to study and find solutions to mitigate these phenomena, a group from the research unit AXES of the IMT School coordinated by Massimo Riccaboni has developed an alert system to detect in advance suspicious behaviour capable of influencing the financial markets. The system, described in the article entitled "A social media alert system for meme stocks".It aims to detect signs in social media - used by retail investors as a community to discuss investment strategies - that something is moving, by analysing discussions and exchanges between users using algorithms. Tested on the social site Reddit, the one also used in the Gamestop affair by retail investors, the system consists of two stages: firstly, activity on social media is monitored, for example the number of posts, comments and interactions, related to specific securities. If these indicators exceed predefined thresholds - calculated by comparing current data with historical data - an initial alert is triggered. If this initial alert is triggered, the system then goes on to examine the structure of the user network. In particular, it identifies whether there are 'influencers' or central users driving the discussion. If the top influencers turn out to be the same over an extended period of time, this suggests a possible coordination between investors, and the final 'warning light' goes on.
Empirical tests, based on data extracted from Reddit, have shown that the system can 'predict' anomalies in the returns and trading volumes of so-called 'meme stocks', i.e. stocks of companies around which online communities build and promote specific narratives, days in advance. Large companies such as Apple and Microsoft, while often discussed online, do not show the same coordination signals. This confirms that the phenomenon specifically concerns small-capitalisation companies, which are often less liquid and more vulnerable to sudden investment movements. In these cases, it is easier to alter the price with a wave of collective buying, especially when the stock also has a high exposure to short positions by institutional investors.
In order to make the system accessible for practical use by the authorities in charge of supervising the proper functioning of stock markets, the methodology described and tested in the paper was used to develop a platform, which can be continually updated with new titles to monitor the performance and possible warning lights. "The shared development on open-access platforms of these monitoring tools helps to increase transparency on the correct functioning," notes Massimo Riccaboni, professor of applied economics at Scuola IMT. "This benefits all investors and in particular those who use social media as a tool to access financial information."
