Reddit Broke the Stock Market — Here’s What to Do Now
Over the past few weeks, novice traders have flooded the stock market with an unprecedented fear of missing out.
Social media outlets such as Reddit and Twitter have led them to believe that trading stocks that Wall Street hates is their key to getting rich.
This is causing a breakdown of the stock market microstructure, which will have real implications for your wealth.
Redditors Made a Big Play on GameStop
Pouring money into hated and heavily shorted stocks started out as a trading strategy. It quickly morphed into a movement against hedge funds and other institutions.
Although the trades worked initially, investors who joined late have lost money.
The traders’ favorite stock, GameStop Corp. (NYSE: GME), lost 78% in less than three days — falling from $469 to $101 per share.
GME’s 3-Day Plunge
The movement against institutions has damaged more than just hedge funds and the traders themselves.
By coordinating an effort against hedge funds such as Melvin Capital and Citron Capital, traders unknowingly caused damage to the market microstructure.
The Damage Has Been Done
Melvin received billions of dollars from Citadel, a market maker that accounts for 25% and 22% of option and stock trading volume in the U.S., respectively.
By plotting against Melvin, traders were indirectly targeting Citadel.
Because Citadel handles a massive amount of trading volume, it has become a critical component of enhancing liquidity. A sudden disruption to its business is a disruption to market efficiency.
Citron has been an outspoken short seller that bets against companies and publishes research showing why others should do the same.
Despite its poor track record in recent years, the act of publishing short reports has helped uncover fraudulent companies in the past.
In response to the recent trend of targeting short sellers by starting short squeezes, Citron announced it would no longer be publishing these short reports.
Although other firms have not explicitly said the same, the damage has been done.
Without short reports, bullish consensus views will go unchallenged and fraud may remain undiscovered for longer periods of time.
Both of these scenarios contribute to market inefficiency.
There’s Good News for Smart Investors
This is good news for traders with a defined strategy. Market inefficiency provides the opportunity to make huge gains in short periods of time.
And with my colleague Michael Carr’s unique trading strategy, all you do is make one trade — using the exact same ticker symbol — once a week, and you can target double- and triple-digit returns every single week.
Michael will have more details about his One Trade strategy in a free webinar for you later this week.
Analyst, Automatic Fortunes