Yahoo Finance’s Alexis Christoforous and Sinan Aral, author of The Hype Machine, discuss social media’s role in the short-print frenzy.
Video transcription
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ALEXIS CHRISTOFOROUS: For more information on the Robinhood GameStop saga, I want to bring in Sinan Aral. He is a professor at MIT and author of ‘The Hype Machine’. Sinan, good to have you here. You wrote a wonderful headline in ‘The Washington Post’ – I want to encourage people to check it out – about the herd mentality of social media and how it is flooding into the real world like never before. What do you think are the long-term implications of this?
SINAN ARAL: Well, I think what we are seeing is the increase in the power of the crowd in a number of different areas in our society simultaneously. We saw it in the election, the aftermath of the election, where information flowing through social media could coordinate an uprising, a riot, across the Capitol. And that was after we even had warning signs when there was a conspiracy to kidnap and kill the governor of Michigan.
Now we see crowds again making a coordinated effort to increase the price of a stock. And let me be absolutely clear. I do not mean to draw an analogy between the GameStop share price and the Capitol riot to say that there is even something ominous going on in the GameStop situation. In the GameStop situation, nothing illegal may have been done. But the similarity is that when information moves so fast and so many people can coordinate so fast, it scales down the power of the crowd like we have never seen before. And that is the similarity between the two.
ALEXIS CHRISTOFOROUS: You know, however, that this is not the first time, right, Sinan, that we have seen social media inflate stock prices and create bubbles. We have seen pumping and dumping schemes happening on social media with misinformation and fake tweets and fake posts on Facebook. So why was the GameStop situation different?
SINAN ARAL: Well, I think a few things. In the past, when we used misinformation to pump stocks and then throw them away, the SEC certainly investigated them in 2017, in 2013 and ’14, and actually charged. There were companies like [INAUDIBLE] and Dreamworks sued by the SEC based on pumping and dumping schemes on social media.
I think the difference in this is that the large short position of several large hedge funds has made it tempting to raise the share price dramatically. And there was this narration of David and Goliath that made the story interesting. And there was a wagon effect you might not have seen with some kind of pump and shower stick. Or it’s easy to coordinate if there’s a story that appeals to the human heart, and if there’s a short position that is vulnerable to the very dramatic rise in a stock price. So I think that was a big difference here.
ALEXIS CHRISTOFOROUS: What do you think can come out of it in terms of regulation? Is the answer, do you think, going to be to keep small investors more constrained, or will it have to be constraints on all investors and perhaps buy different constraints on short selling and margin?
SINAN ARAL: Well, I mean, I think we need a thorough SEC investigation first. We’re actually looking at a plane crash, but the plane is still 30,000 feet. It’s not over yet. And I saw a tweet saying: I’m confused. Is your hashtag #holdtheline or hashtag #holdthebag? Because all the containers can not sell their stock at the same time. And it is very likely that the price will go down. And many people can be hurt in that process.
I do not think we should come to conclusions and create more restrictions in a knee-jerk way. We need to start an investigation that understands who was in this crowd. Were there institutional investors who had ties to institutions? What were their positions? Was there incorrect information disseminated in this process? Because it could possibly be a waste of the SEC.
I think here are two major risks. If you detach the prices of stocks from the underlying economic reality of companies, there is a huge potential for instability. The second major threat is manipulation. If you thought Russia thinks it might be productive to interfere in our elections through social media, imagine what they think they can do now, as you can change the share price outcomes by manipulating or talking about it on social media .
And we know that there are automated trading algorithms linked to social media that trade based on sentiment. So you do not even have to find someone to buy the stock. As long as it has been talked about, it can cause algorithms that trade algorithmically on the stock.
I think finally, what we need to do is, after an investigation, we need to investigate the connection between communication about a stock and trading that stock. We need guidelines on how we can communicate in ways that maintain stability. I agree with your last caller, your last guest, who said that transparency is important. This is probably an important part of it. But we need an investigation first.
ALEXIS CHRISTOFOROUS: For sure. Much for the SEC to consider. Sinan Aral, professor at MIT, author of ‘The Hype Machine’, thanks for your insights.
SINAN ARAL: Thank you.
Originally published