Back to the future: Sudden shifts in market dynamics
28 May 2024
The financial industry faced a blast from the past earlier this month when recent events in the equities markets showcased similarities with the GameStop saga. Matthew Chessum, director of securities finance at S&P Global Market Intelligence, explores the complexities of the retail investor
Image: Shutterstock
Earlier this month, the equity markets were sent back in time to a period when nothing was as it should be. As Covid-19 gripped the planet, countries were in lockdown; governments were in crisis mode and office blocks were empty as employees were sanctioned to work from home. During this period, with bars and restaurants shut, with more money in their pockets, retail investors started to look for ways to invest their spare cash.
To do this, many turned to social media platforms such as Reddit to share their thoughts, analysis, and opinions on a wide range of investments. Certain individual investors attracted huge followings because of their dynamic online personas and alternative opinions gaining them an impressive level of influence among millions of retail investors. One of the biggest online followings was attracted by ‘Roaring Kitty’, the alias of financial analyst and investor Keith Gill, who shared his investment insights and analysis on YouTube, and Reddit, under the username ‘DeepF***ingValue’.
Using social media, ‘Roaring Kitty’ shared detailed analysis on stocks that he believed were deeply undervalued. Gill’s posts and videos were used to emphasise his conviction that certain stocks could experience substantial price increases. The most famous was GameStop (GME). Following a massive wave of interest from retail investors, Gill’s posts often sent share prices ‘to the moon’ — rising substantially, potentially with no limits.
Following this practice, the term ‘meme stock’ entered into the vocabulary of Wall Street. Meme stocks were often considered to be a battleground between retail investors and hedge funds. While hedge funds often decried the lack of business fundamentals and performance in a stock price, retail investors believed that, given enough support from investors, a climbing stock price can often lead to a stronger business — a rebounding share price provides the ability to raise additional cash reserves through the capital markets.
In 2020, this is exactly what happened with GameStop, as Gill’s bullish stance on the company galvanised a massive wave of retail investor interest in the stock. This subsequently led to a short squeeze, as heavy and rapid buying activity from retail investors forced short covering by hedge funds. This was reported as a main street versus Wall Street situation, and as such attracted significant media attention. The use of social media and the dynamic behind the swift nature of the retail purchases also attracted scrutiny by regulatory authorities.
In May 2024, some market participants may have felt as if they had jumped into their DeLorean’s and taken a trip back to the future, as ‘Roaring Kitty’s’ reemergence on social media caused meme-stock traders to pile into meme stocks once again. The share prices of both GME and AMC Entertainment Holdings (AMC) increased significantly as a revival of the retail-trading frenzy that rocked markets during the pandemic took hold once more. The market valuation of GME increased by more than US$11 billion in just a few days, while AMC gained US$1.2 billion. Option volumes also surged in both stocks to their highest levels since July 2022.
In the securities lending markets, despite the increased interest seen in both stocks in the cash and options markets, activity remained a long way from some of the highs that were seen previously. At its peak, on 20 January 2020, 87 per cent of GameStop’s outstanding shares were on loan compared to just 29.46 per cent on 10 May 2024. For AMC, shares on loan spiked during August 2023, as the conversion of AMC preference shares (APE) into AMC standard line shares created an arbitrage opportunity, pushing the percentage of shares on loan to 43 per cent. This compares to just 26.81 per cent during May 2024. When looking at the volume-weighted average fees (VWAF) on offer across both stocks, a similar situation was seen, with GameStop peaking at 681bps on 14 May 2024 versus 8,169bps on 7 May 2020, and 493bps on 15 May 2024 versus 73,643bps on 24 April 2023 for AMC.
However, what changed this time was the ability of investors to foresee the impact of any moves in sentiment ahead of the crowd, through the analysis and usage of multiple data points. Taking GameStop as an example, when looking across a range of datasets available at S&P Global Market Intelligence, it was clear to see that sentiment was changing in advance of any significant moves in share price.
Retail flows are a significant component of meme stock trading, and clear spikes could be seen in retail purchases from 2 May onwards — growing from purchases of very low, single-digit millions of dollars per day, to over US$1,200 million on 13 May. The profit and loss per share on open short positions also started to become increasingly negative from 2 May onwards, growing to over US$15 loss per share on 14 May, as the share price started to increase rapidly.
A clear move in the short squeeze score was therefore seen, as most of the short positions quickly moved out of the money. Hedge fund positional data also showed that the long gross ratio of hedge funds stood at three to four per cent at the time, suggesting that most of the contributed positions were shorts. As the share price increased, shares became more expensive to borrow. The intraday dataset showed that indicative fees were rapidly rising, with intraday indicative fees climbing almost 100 per cent when compared to the one-day indicative end of day fee, giving investors a warning that the market was starting to move.
Figure 1: Gamestop Corp (GME) intraday vs end of day volumes
As was seen during the US regional banking crisis last year, and the most recent shift in sentiment across these meme stocks, significant market movements are now materialising at a much quicker pace than ever before. The rise of retail investors, who now account for nearly 20 per cent of daily trading volumes in the US, is having a sizable impact on market behaviour, as larger and faster swings in both prices and sentiment are taking hold.
Timely data remains essential to navigating these sudden shifts in market dynamics. Not only do investors need to understand the fundamental side of their investments, but Gamestop has shown us that they also need to be tapped into multiple data sources to ensure they capture the growing importance and complexities of the retail investor.
To do this, many turned to social media platforms such as Reddit to share their thoughts, analysis, and opinions on a wide range of investments. Certain individual investors attracted huge followings because of their dynamic online personas and alternative opinions gaining them an impressive level of influence among millions of retail investors. One of the biggest online followings was attracted by ‘Roaring Kitty’, the alias of financial analyst and investor Keith Gill, who shared his investment insights and analysis on YouTube, and Reddit, under the username ‘DeepF***ingValue’.
Using social media, ‘Roaring Kitty’ shared detailed analysis on stocks that he believed were deeply undervalued. Gill’s posts and videos were used to emphasise his conviction that certain stocks could experience substantial price increases. The most famous was GameStop (GME). Following a massive wave of interest from retail investors, Gill’s posts often sent share prices ‘to the moon’ — rising substantially, potentially with no limits.
Following this practice, the term ‘meme stock’ entered into the vocabulary of Wall Street. Meme stocks were often considered to be a battleground between retail investors and hedge funds. While hedge funds often decried the lack of business fundamentals and performance in a stock price, retail investors believed that, given enough support from investors, a climbing stock price can often lead to a stronger business — a rebounding share price provides the ability to raise additional cash reserves through the capital markets.
In 2020, this is exactly what happened with GameStop, as Gill’s bullish stance on the company galvanised a massive wave of retail investor interest in the stock. This subsequently led to a short squeeze, as heavy and rapid buying activity from retail investors forced short covering by hedge funds. This was reported as a main street versus Wall Street situation, and as such attracted significant media attention. The use of social media and the dynamic behind the swift nature of the retail purchases also attracted scrutiny by regulatory authorities.
In May 2024, some market participants may have felt as if they had jumped into their DeLorean’s and taken a trip back to the future, as ‘Roaring Kitty’s’ reemergence on social media caused meme-stock traders to pile into meme stocks once again. The share prices of both GME and AMC Entertainment Holdings (AMC) increased significantly as a revival of the retail-trading frenzy that rocked markets during the pandemic took hold once more. The market valuation of GME increased by more than US$11 billion in just a few days, while AMC gained US$1.2 billion. Option volumes also surged in both stocks to their highest levels since July 2022.
In the securities lending markets, despite the increased interest seen in both stocks in the cash and options markets, activity remained a long way from some of the highs that were seen previously. At its peak, on 20 January 2020, 87 per cent of GameStop’s outstanding shares were on loan compared to just 29.46 per cent on 10 May 2024. For AMC, shares on loan spiked during August 2023, as the conversion of AMC preference shares (APE) into AMC standard line shares created an arbitrage opportunity, pushing the percentage of shares on loan to 43 per cent. This compares to just 26.81 per cent during May 2024. When looking at the volume-weighted average fees (VWAF) on offer across both stocks, a similar situation was seen, with GameStop peaking at 681bps on 14 May 2024 versus 8,169bps on 7 May 2020, and 493bps on 15 May 2024 versus 73,643bps on 24 April 2023 for AMC.
However, what changed this time was the ability of investors to foresee the impact of any moves in sentiment ahead of the crowd, through the analysis and usage of multiple data points. Taking GameStop as an example, when looking across a range of datasets available at S&P Global Market Intelligence, it was clear to see that sentiment was changing in advance of any significant moves in share price.
Retail flows are a significant component of meme stock trading, and clear spikes could be seen in retail purchases from 2 May onwards — growing from purchases of very low, single-digit millions of dollars per day, to over US$1,200 million on 13 May. The profit and loss per share on open short positions also started to become increasingly negative from 2 May onwards, growing to over US$15 loss per share on 14 May, as the share price started to increase rapidly.
A clear move in the short squeeze score was therefore seen, as most of the short positions quickly moved out of the money. Hedge fund positional data also showed that the long gross ratio of hedge funds stood at three to four per cent at the time, suggesting that most of the contributed positions were shorts. As the share price increased, shares became more expensive to borrow. The intraday dataset showed that indicative fees were rapidly rising, with intraday indicative fees climbing almost 100 per cent when compared to the one-day indicative end of day fee, giving investors a warning that the market was starting to move.
Figure 1: Gamestop Corp (GME) intraday vs end of day volumes
As was seen during the US regional banking crisis last year, and the most recent shift in sentiment across these meme stocks, significant market movements are now materialising at a much quicker pace than ever before. The rise of retail investors, who now account for nearly 20 per cent of daily trading volumes in the US, is having a sizable impact on market behaviour, as larger and faster swings in both prices and sentiment are taking hold.
Timely data remains essential to navigating these sudden shifts in market dynamics. Not only do investors need to understand the fundamental side of their investments, but Gamestop has shown us that they also need to be tapped into multiple data sources to ensure they capture the growing importance and complexities of the retail investor.
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