The perils and promise of ‘meme’ stock trading

This is an excerpt from AltFi’s Digital Wealth State of the Market Report 2021, which is available for free here.

With the Covid-19 related trading boom, more and more everyday investors are getting involved in the once-inaccessible investment industry.

Trading and investment apps are still seeing volumes explode as people are turning to the stock market at a time when there is not much else to do.

But, it’s not all sunshine and rainbows and massive returns; the face of the trading industry has changed forever with the rise of so-called meme stocks.

To Meme, Or Not To Meme

Meme stocks can be described as any stock that catches the eye of investors on Reddit or Twitter—most notably the Reddit thread r/WallStreetBets.

Back in January of this year, several stocks surged by several hundred percentage points, leading some trading platforms to freeze trading of said meme stocks.

The surge of activity sent shockwaves through the industry, with everyday investors seeing returns of thousands of dollars—sometimes even millions—while some hedge funds saw their positions plummet. And it’s not just investors across the pond getting wrapped up in the craze either; trading platforms in the UK are in the thick of it too.

“This phenomenon fundamentally shifted market dynamics and, we suspect, we will continue to see an impact for years to come,” Adam Dodds, CEO and co-founder of UK-based trading and investment app Freetrade, told AltFi.

One such hedge fund to fall foul of the Reddit investors was Melvin Capital, which had taken a substantial short position on US video game store GameStop ($GME), worth roughly $55m. Following a tip-off on r/WallStreetBets, everyday investors bought as much GME as they could, leading Melvin to haemorrhage nearly $3bn in the process.

Freetrade saw thousands of new customers sign up to its platform amid the Reddit vs Wall Street saga in just a few days.

“The boom in retail investor activity from January and February this year marked a step-change in the rate at which we’ve been acquiring new customers and our growth as a platform overall,” Dodds added.

“There was a massive spike with over 100,000 new registrations within a matter of days during that period of intense market activity, monthly acquisition has remained more than 40 per cent up on the period immediately prior. Our business has effectively grown 4x from August 2020 to August 2021 when looking at funded customers, AUA growth, revenue growth,” he continued.