The dynamics of the Reddit collective action leading to the GameStop short squeeze (2401.14999v3)

Abstract: In early 2021, the stock prices of GameStop, AMC, Nokia, and BlackBerry experienced dramatic increases, triggered by short squeeze operations that have been largely attributed to Reddit's retail investors. These events showcased, for the first time, the potential of online social networks to catalyze financial collective action. How, when and to what extent Reddit users played a role in driving up these prices, however, remains unclear. We address these questions by statistical analysis of time series with high temporal resolution, about social activity on Reddit and Twitter as well as stock trading volumes. We find that increasing Reddit discussions anticipated high trading volume before the GameStop short squeeze, with their predictive power being particularly strong on hourly time scales. This effect emerged abruptly a few weeks before the event, but waned once the community of investors gained widespread visibility through Twitter. Meanwhile, the collective investment of the Reddit community, quantified through each user's financial position on GameStop, closely mirrored the market capitalization of the stock. These evidences suggest a coordinated action by Reddit users in developing a shared financial strategy through social media. Towards the end of January, users talking about GameStop contributed to raise the popularity of BlackBerry, AMC and Nokia, which emerged as the most popular stocks as the community gained global recognition. Overall, our results shed light on the dynamics behind the first large-scale financial collective action driven by social media users.

• The paper establishes that Reddit discussions robustly predicted GameStop trading volumes, with significant influences observable at hourly intervals two weeks before the event.
• The paper employs Granger causality tests and vector autoregressive models alongside computer vision techniques to quantify coordinated investments by Reddit users, amounting to over 1% of the market capitalization.
• The paper identifies three distinct behavioral phases—Discussion, Action, and Visibility—and shows that a key high-profile tweet catalyzed broader public engagement following coordinated trading actions.

The Causal Role of Reddit Collective Action on the GameStop Short Squeeze

The paper undertakes a rigorous investigation into the role of Reddit's WallStreetBets (WSB) community in the GameStop (GME) short squeeze of early 2021. This phenomenon, marked by a dramatic surge in GME's stock price, demonstrated the ability of online social networks to drive significant financial events, challenging large institutional investors. Utilizing causal inference techniques, the authors dissect the interplay between discussions on Reddit and subsequent trading activities.

Methodology

The researchers employ data capturing activities from both Reddit and Twitter, combined with high temporal resolution trading data to establish causal links. Central to their approach are Granger causality tests and Multivariate Vector Autoregressive models, employed to discern predictive relationships among signals from these platforms and market indicators.

Key Findings

1. Reddit's Predictive Power: Discussions on Reddit were found to robustly foreshadow GME trading volumes, particularly strong at hourly intervals, suggesting a significant causal influence on stock market activities. This effect was observable approximately two weeks before the short squeeze, diminishing as the event gained wider visibility on platforms like Twitter.
2. Coordination Evidenced Through Collective Investments: Reddit users' financial positions in GME were quantified using computer vision to analyze posted account screenshots. The collective position of these users was at least 1% of GME’s market capitalization, highlighting the substantial involvement and coordination within the community.
3. Phases of Behavior: The analysis revealed three distinct phases in the event: Discussion, Action, and Visibility. The transition from mere discussion to actionable trading strategies was observed on January 13, 2021. Visibility surged following a high-profile Tweet by Elon Musk on January 27, 2021, suggesting broader public engagement post-action initiated by WSB users.
4. Influence on Other Stocks: Alongside GME, stocks such as BlackBerry, AMC, and Nokia were also implicated in short squeezes. The Reddit-to-trading volume anticipatory relationship observed in these stocks further illustrates Reddit’s broader impact within this orchestrated financial movement.

Implications

The paper provides compelling evidence that the WSB subreddit served as a coordination hub, facilitating a collective investment strategy that significantly impacted market dynamics. This demonstrates the profound effect online communities can exert on financial markets, particularly in an era where rapid communication is possible. The findings suggest a need for adaptive monitoring strategies of social media-driven market movements, as they present a novel dynamic interacting with traditional financial frameworks.

Future Directions

The paper highlights areas for future exploration, primarily whether such phenomena can recur in different contexts. Given the dynamic interplay in this case, further research could extend to the exploration of similar collective actions across other forms of media or financial instruments. Additionally, nonlinear models could provide deeper insights into such complex causality, potentially capturing richer interdependencies than linear techniques.

In conclusion, this paper successfully unravels the multifaceted role of Reddit in the GME short squeeze, marking a pivotal advancement in understanding online social networks' capacity to drive real-world financial outcomes. The rigorous methodology and detailed analysis provide a framework for future studies into the intersection of social media and financial markets.