One of the most significant news stories in the financial press over the past six months has been the emergence of 'social media' traders. These are traders -- fueled by stimulus payments -- that gravitated to Robinhood and Reddit sites like WallStreetBets. The group gained much notoriety due to a tremendous short squeeze created in GameStop (GME) and a few other individual stocks. Not only did the business media cover this incessantly, but there were Congressional hearings as well.
A common theme in stories about these traders is that they were a potent force that would likely have a lasting impact on the market, however over the last few months, this story has disappeared. The 'social media' movement has fizzled out at the same time that many of the hot small-cap themes have fallen into bear markets.
There is still periodic mention of GameStop, but social media traders have been largely unsuccessful in generating sustained movement in anything else for very long. The efforts to create short squeezes in things like silver were unsuccessful. Even the cryptocurrency plays like dogecoin reversed hard on the folks that talked about holding positions with 'diamond hands.'
So what happened? Did these small traders just suddenly give up?
The reality is that much of action in stocks like GME was never really driven that much by the little guy. There were big, sophisticated hedge funds playing this game. Even Bill Hwang, who blew up the Archegos Capital, has been rumored to be one of the people that helped create the massive short squeeze.
Social media traders were a good story, but they really are nothing new. This sort of trading by small investors has been around for decades. It gained some added attention as some stimulus money was thrown at the market, but the very active day traders quickly disappeared. Gambling on stocks was fun for a while, but when the market turned they found out that it isn't nearly as easy as it sounds.
The idea that a group of traders on a Reddit site can produce sustained momentum in a small stock with a big short position is very appealing to small traders that want to stick it to 'the man,' but the problem is that there are just too many big and sophisticated market players that will manipulate these situations for their own benefit.
The playwright David Mamet once wrote, "Old age and treachery will always beat youth and exuberance". That probably is the best summary of what has happened to many social media trades. They simply were no match for the veteran market participants that sided with social media traders when it benefited them but turned on them quickly when they had run up some solid gains.
I believe that there is a new crop of individual and social media traders that will stick around, but they are the ones that recognize that this is not simple or easy. The market is so potentially profitable because it is difficult and requires effort. Individual traders will have some market influence when it comes to some stocks, but it will be very short-lived in most cases
A consequence of this shift in social media trading is that many stocks are now suffering from a lack of interest. That will eventually be digested, and we will move forward, but to understand this market, it is necessary to understand what happened to social media traders.