Wall Street getting ready for Reddit traders

In the past weeks, many of Wall Street’s largest hedge funds were rattled. This was after retail traders drove up the prices of stocks that were commonly bet against. This resulted in large losses for some of the biggest investors. 

For instance, Melvin Capital lost 53% in January but received fresh cash during the month’s last days. Melvin started this year with $12.8 billion assets but ended with just $8 billion. 

The prices of silver drastically went up as well after messages on Reddit circulated. They asked retail investors to pile into the market. 

These specific market moves prove that retail traders are becoming more powerful, especially in financial markets. Years ago, the market was dominated by bigger and prominent institutions. Today, forums such as WallStreetBets on Reddit seem to change the game. 

WallSteetBets became huge and even made it to every major news source over the weeks. While most people never heard of it before, it was already building its momentum throughout the pandemic.  

And right now, Wall Street might use one possible solution to fix the ongoing fiasco. And that is to use robots. However, it’s going to be a challenging task as well. 

According to a source, humans are not equipped to follow WallStreetBets’ course of action. And while machines could also help, training them will not be easy. The algorithm has to learn new words, memes, and even typos that speak about the subject. 

AI and Humans Learning New Investment Slang

In case there are new slangs, then the dictionary for these machines will have to be updated by humans too. In a global context, the challenge will be bigger, considering that emojis used in different cultures may vary as well. 

StockPulse, a social-media analytics firm, gave an example of the word ‘hold’, where the computer needs to understand the term as a verb and as an exchange-traded fund. 

Experts say that training robots or machines is not just about feeding standard English words. They need to check the comments themselves and manually identify if these are positive or negative. 

Right now, the terms from the forum are hard to decipher, even for those who are already familiar with Wall Street’s language.  

How robots could work on Reddit was shared as well. For example, a Reddit user talks about how Blackberry Ltd. is worth more than its stock price. There will be an algo trained by a vendor who records the ticker and then sweeps the post for trading sentiment signals. From there, they will analyze all the bullish calls. 

StockPulse also shared that GameStop’s buzz was first seen on Reddit back in December. This was a month before the price started to skyrocket. 

Meanwhile, Emmanuel Hauptmann shared that his RAM Active Investments team is also monitoring Twitter for stock discussions. They see it as highly correlated with Reddit. However, his expectations are said to be low. 

New Generation of Retail Traders are Different 

Years ago, investors and professional analysts will call day or retail traders ‘dumb money’, apparently not making any noise in the market. However, with the havoc that happened in the past weeks, they believe that the new generation of retail traders is different. 

They think that these retail traders are using sophisticated strategies. And since they communicate them through social media, it amplifies their tactics which other Reddit users can follow. 

James Kardatzke, the co-founder of Quiver Quantitative, shares that while these Reddit traders are not professional investors, they seem to use a deep-level analysis when forming their strategies. 

More People Joining WallStreetBets 

As of the moment, there are still several retail traders that follow WallStreetBets. One of them shared that he won’t be shedding a tear at the thought of large hedge funds losing money to working-class people like him. 

He treats the group as ‘diamond-handed heroes’ and appreciates that they are willing to share financial tactics as opposed to those who do it behind closed doors. 

‘Us Against the World’ 

According to Clay Shirky, a professor from New York University, this message, ‘Us Against the World’ is a clear indication of the gap between Wall Street and Main Street. 

This phenomenon is not new. Before the existence of social media, retail traders use platforms such as Silicon Investor and RagingBull.com. Back in the 90s, AOL and Yahoo chat rooms were the avenues to exchange tactics and financial rumors. It’s just that with social media, the information spreads fast. We will just have to wait for advanced technology to burst the bubble.