The echo chamber effect resounds on financial markets: a social media alert system for meme stocks

Abstract

The short squeeze of Gamestop (GME) has revealed to the world how retail investors pooling through social media can severely impact financial markets. In this paper, we devise an early warning signal to detect suspicious users' social network activity, which might affect the financial market stability. We apply our approach to the subreddit r/WallStreetBets, selecting two meme stocks (GME and AMC) and two non-meme stocks (AAPL and MSFT) as case studies. The alert system is structured in two stpng; the first one is based on extraordinary activity on the social network, while the second aims at identifying whether the movement seeks to coordinate the users to a bulk action. We run an event study analysis to see the reaction of the financial markets when the alert system catches social network turmoil. A regression analysis witnesses the discrepancy between the meme and non-meme stocks in how the social networks might affect the trend on the financial market.