Is the Reddit trading frenzy a sign of things to come?

Guest post by Craig Harbour

The world’s financial markets are volatile enough at the best of times, but recently entities such as shares and commodities have seen their prices fluctuate wildly as a result of external market factors.

This is largely thanks to the impact of the Coronavirus and subsequent imposition of Lockdown measures across the globe, which have curbed share prices in hospitality ventures when enabling stock in medical device companies to soar.

Not only this, but it’s thought that Reddit trading communities are also beginning to manipulate prices on a mass scale disrupting large-scale corporate investors. We’ll explore these below, while asking whether this is a sign of things to come.

Reddit, online traders and the rise and fall of GameStop

Towards the end of January, the ailing US brand GameStop was close to extending its share price decline, with its stock hovering around the $20 mark as 2021 got into full swing.

It was at this time that the price suddenly began to embark on an upward trajectory, as an army of Internet traders on Reddit began to relentlessly buy shares at a significantly discounted price.

By the afternoon, the stock price has risen exponentially from its starting point of $20 to a staggering $500, with this sudden and coordinated surge costing institutional investors and banks on Wall Street almost $20 billion in mark-to-market losses.

This scenario was compounded by the fact that institutional clients were preparing to short-sell GameStop shares, with many required to abandon this carefully laid plan and their bearish bets as they sought to exit their trades.

While this potentially capped losses from rising even higher, some institutional funds were particularly hard hit. Take Melvin Capital, for example, which lost 53% value in January largely as a result of its GameStop losses. So, while the fund ended the month with more than $8 billion under assets, it continues to lick its wounds in the wake of a jarring series of unexpected events.

Is this a sign of things to come?

Many have argued that the recent hike in silver was also inspired by similar activity conducted through trading communities, although the infamous group WallStreetBets have denied any involvement.

If the group was responsible, however, it’s fair to surmise that Reddit’s highly touted short-squeeze failed to achieve the same kind of rally experienced by GameStop, even in a market that should be favourable for the rising price of silver.

In this case, the efforts of online traders certainly failed to inspire sustainable gains in this industrial precious metal, with the market valuations quickly dipping below the breakout level of $27.50 from an initial high of $30.

This suggests that institutional investors may not have much to fear from future Reddit drives, especially if regulators decide to monitor various marketplaces and crackdown on the practice of widespread price manipulation.

From an individual trader perspective, it’s also sensible to monitor market trends and movements through platforms such as the MetaTrader 4 (MT4).

With this app, you can also use customisable charts to present data in a preferred way, with this aiding more informed decision making in real-time.

More on the platform MetaTrader 4

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