Wall Street looks for ways to avoid stampede of Reddit day traders as a ‘force to be reckoned with’

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Wall Street looks for ways to avoid stampede of Reddit day traders as a ‘force to be reckoned with’


Stock market participants are reassessing how they trade after investors congregating on social media platforms such as Reddit devastated deep-pocketed hedge funds in dramatic fashion this week on Wall Street.

“Retail traders are likely to continue to be a force to be reckoned with, which will likely permanently affect the business models of institutional investors,” said Maneesh Deshpande, head of equity derivatives strategy at Barclays, adding the ongoing short squeeze of a few favored stocks was a “wakeup call” for Wall Street.

Those dangers were highlighted after hedge funds like Melvin Capital were forced out of their short positions to buy back shares, supercharging gains for stocks like AMC EntertainmentAMC and Gamespot. GME

On the other side, retail investors who have managed to correctly identify stocks where short-selling investors were vulnerable have reaped sizable returns.

A portfolio made up of highly shorted stocks touted on Reddit was up 150% in the past two months, according to data from Wolfe Research.

See: GameStop frenzy puts clearinghouses in spotlight as investors weigh systemic risk fears

Some money managers are already scrambling to anticipate retail traders next targets on platforms such as Reddit and Discord.

The Financial Times reported that hedge funds were looking at so-called alternative datasets tracking activity on Reddit to get ahead of day traders.

Indeed, Yin Luo, a quant strategist and vice chairman of Wolfe Research, said his firm came up with a tool making use of natural language processing to crunch the large volumes of text on subreddit forum wallstreetbets and assess which stocks were targeted by retail traders.

He then tracked how much of these discussions on Reddit turned into actual buying and selling of stocks through Robinhood and other brokers catering to retail traders.

Investors using the tools could thus mitigate the risk associated with holding short positions, and learn when a stampede of retail traders would arrive and snap up the shorted company’s shares, said Yin.

Read: Robinhood day traders are squeezing the hedge funds — here’s why it may continue



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