The “meme stocks” on the stock markets are back in the spotlight – shares of comparably little-known second-line stocks that are driven to astronomical heights by speculative retail investors through concerted buying campaigns on social media. While AMC and Gamestop were the two stars of the first meme stock wave in the previous year, Bed Bath & Beyond in particular has recently made waves with a price action rollercoaster ride.
The retailer’s share price intermittently quadrupled in August, whetting many investors’ appetites for other small caps. The company is heavily indebted and, according to analysts, threatened with insolvency, but news about possible financing solutions fuelled bets on the stock.
Bed Bath & Beyond Plummets After Cohen Exit
The boom was quickly followed by a crash, however, with Bed Bath & Beyond’s stock plummeting by more than 50 per cent in a matter of days after it was announced that RC Ventures, the company owned by activist investor Ryan Cohen, had sold its entire stake in the home furnishing company for USD 178m.
Cohen’s entry into Bed Bath & Beyond in March had triggered a run on the beleaguered stock this year. Now the investor, considered a role model by young individual investors, has sold off his stake. According to calculations by the financial news agency Bloomberg, Cohen has made a profit of $68 million on his short-term exposure to the stock.
Retail and professional investors are now accusing the investor of price manipulation and are demanding consequences. For example, when Cohen announced that he had acquired call options to buy more Bed Bath & Beyond shares, he may have deliberately incited the interest of many investors in the share. On social media, retail investors interpreted the purchase as a sign that Cohen was betting on a rising share price and joined in with purchases.
Gamestop Rally Marks the Beginning of the Meme Stock Hype
For quite a while, Cohen was considered a meme stock hero. Last year, the investor and his company invested in the video game retailer Gamestop, where he also became a member of the board of directors. Meanwhile, an investor fan community grew on social media platforms such as Reddit, viewing this as a positive sign and believing that the share had great price potential. In concerted actions, the investors drove Gamestop shares upwards, causing massive losses for hedge funds.
With their purchases, the small investors forced the hedge funds to unwind their bets on a falling share price. This drove the shares even higher and cost the funds billions. The Gamestop share price multiplied several times in succession and collapsed several times. Of course, all this had little to do with fundamentals as the video game company suffered from declining sales and losses.
Scott Galloway, professor at the economics department of New York University, made a harsh comparison at the time: online brokers like Robinhood, which were popular with meme-stock traders, were the latest crack dealers, whose aim was to constantly trigger the release of the happiness hormone dopamine in their customers. They would do everything in their power to use game elements to constantly trigger new deals: “Transactions are celebrated with falling confetti. The broker app looks like a colourful interface from Candy Crush,” said Galloway. The new reality of home office working during the pandemic may have further bolstered the trend to gamble from home.
Manipulation Allegations Against Platforms and Ryan Cohen
Other stocks, such as those of cinema chain operator AMC Entertainment, also turned into a plaything for speculators organised on social media and retail-investor-oriented trading platforms in 2021. In view of the high turnover and price volatility, Robinhood and other trading platforms popular with traders introduced temporary trading restrictions for some meme stocks, drawing displeasure from the community. Numerous other online brokers such as E-Trade or TD Ameritrade, but also the the large asset managers Charles Schwab and Fidelity’s platforms, could no longer handle the deluge of speculators and pulled the plug, with the prices of affected shares partly crashing as a consequence.
According to a court ruling in August, Robinhood now faces market manipulation charges. Investors who suffered losses because of the restrictions may now have the green light to file a class action lawsuit. Whether the US Securities and Exchange Commission (SEC) will join the manipulation charges against Ryan Cohen remains to be seen, but many experts expect stock market regulators to generally impose stricter rules to regulate trading via social media and to protect retail investors.
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