Retail investors short squeeze financial institutions
Companies such as Cineworld and Gamestop have seen their shares targeted by retailer investors as they use social media platforms to drive up their shares.
The stock market has experienced some turbulence and volatility recently relating to retail investors that have been short squeezing hedge funds and financial institutions.
They have been using social media platforms to target and urge investors to buy low value stocks before they decline. They do this by selling borrowed stock from a broker and then selling them on to investors. If the share price falls the investor can buy the shares back and make a profit.
The problem with this is that sellers have to keep buying the stock in order to make money which pushes the price up higher and higher. This means that the fund managers bets’ on the price were wrong and they lose money.
Investors that short squeeze are not only manipulating the market but may have access to information that are not widely available putting them at risk of breaching market abuse regulations and leaving investors open to the risk of losing substantial amounts of money.
The most recent examples of this are Gamestop a US game retailer where retail investors used Reddit to target fund managers although this isn’t the only company affected by the short squeeze as retail investors are buying struggling stocks across the market which could have ramifications for the entire market spiralling out of control as stocks are overinflated creating huge losses for the company too.
Short squeeze manipulates the market and it is only a matter of time before the government and regulators step in to control the situation. Where market manipulation is easy to detect, it is illegal under the Market Abuse Regulations — the act of artificially inflating the market to make a profit.
There is no evidence that this will end well as shares worth very little have been sold for a huge amount of money but at a loss to investors. The question is whether this is solely driven by retail investors as the tactics are becoming more sophisticated and targeted.
The current market activity is another illustration of the problem with misinformation on social media and perhaps an indication that regulators are about to impose stricter regulations on social media platforms in an effort to tackle these problems to prevent a repeat of the financial crash in 2007 particularly because the Covid-19 is likely to see people plunge ever further in debt problems.