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Trading Education Posted by Team Topstep July 2, 2021

Meme Stocks & Market Manipulation

Are Reddit traders engaging in stock manipulation? Today on Limit Up! Jack and Dan talk about why it’s so hard to nail down what is and isn’t manipulation and why meme stock traders point out interesting flaws in the current system.





Meme Stocks & Market Manipulation

Meme stocks have been in the news for months now, but Jack and Dan still have questions. Today on Limit Up! we’re talking about whether the Reddit traders who ran up the prices on several stocks this past year engaged in market manipulation. 

Jack and Dan agree that the Reddit traders almost certainly engaged in price manipulation for stocks like Gamestop and AMC. By congregating and strategizing to pump the price, they were trying to subvert the forces of the market. But, both Jack and Dan agree that’s not really the issue. They find it entertaining to see retail traders sticking it to the institutional players. “Really, it was only the big boys and big girls who got to manipulate before,” says Jack. Now, he says, the playing field has been leveled in some ways.

Then they take a bit to talk about what stock manipulation is and some fascinating history. There are endless ways to manipulate prices, and people have been doing it since there were markets. Finally, Jack takes a moment to talk about a curious case in 1955 when two traders decided to corner the onion market by buying up the supply. The situation got bad enough the regulators stepped in, leading to the Onion Futures Act, which bans trading onion futures contracts and movie ticket receipts. 

After looking back on the history of manipulation, Jack and Dan ask what form of manipulation the meme stock traders could be engaging in. But, as Jack points out, it’s less of a manipulation scheme and “more of an all-out assault on things deemed to be short.” As a result, the traders are less focused on making money from the trades and more excited by watching the numbers go up and seeing hedge funds lose money. 

Taking on the Wall Street Giants

The big institutional trading firms that shorted the meme stocks are struggling to figure out a way to deal with the newly minted trader demographic. 

“I think the reason they got rolled is that they can’t imagine a group of people who would act outside of what they see as rational in stocks,” says Jack.

The COVID pandemic has democratized trading in a lot of ways, says Dan. It allowed people time in their days to research, put money in some people’s pockets, and kept them inside. However, with the country’s opening up, Dan isn’t sure the meme traders will stay as strong as they have in the past. He also advises anyone holding the meme stocks to sell before they collapse from inflated prices. Meme traders have taken the rules of the markets and institutions and shown how they can work for the average retail trader, even when the stock is virtually worthless. As Jack says, “price is in the eye of the beholder.” 

To learn more about how meme stock traders and others use social media to get info on trades, check out our episode on the topic here.