Meme Stocks Creates False Market, Price Don’t Reflect Demand

On Wednesday, June 16, Man Group CEO stated that the meme stocks create a false market, and it should be avoided.

The New York Stock Exchange Intercontinental Exchange Inc President said that price formation doesn’t reflect the supply and demand.

She added that some meme stocks have a high level of retail participation. The vast majority of order flow might be a somewhat problematic trade-off of exchanges.

Also, the NYSE head stated that these stocks might be distorted since major trades are staged away from public exchanges where share price formation occurs.

These so-called “meme stocks” are rising to fame since retail traders favor them on platforms like Reddit. Furthermore, these are some of the most excessively traded and volatile shares on any given day.

Online users rallied these stocks since it often starts as low-priced and is highly shorted. This year, the share of the video game retailer GameStop Corp and theater chain operator AMC Ent surged, where the former advanced over 1,600% in January alone.

As a result, this occurrence prompts some brokers to create trading halts and ignite Congressional and regulatory hearings.

During the COVID-19 pandemic, retail trading soared due to retail brokerages’ shift to commission-free trading. Now, individual trades are responsible for around 35% of market volume, rising from 20% pre-pandemic. While in meme stocks, they contributed as much as 70% of the volume.

The majority of these retail orders bypass the exchanges due to an arrangement called payment for order flow. Here, retail brokerages are selling their customers’ marketable orders to wholesale brokers. Then, the wholesalers match the orders internally as they try to profit off the bid-ask spread.

Meanwhile, they offer the best market price to retail traders.

False Market Analysis

Last week, the US Securities and Exchange Commission said that these practices raise conflict of interests questions.

Therefore, it will be in a list of wide reviews of stock market rules. Moreover, it will examine whether off-exchange trading distorts the price discovery mechanism for stocks. These tradings are about 50% of the market if the institutional block traders are a part of it.

Based on the analysis, it was found that the typical rise for an individual stock is the result of 10.5 million members of Reddit’s Wallstreetbets. This lasted nine days ahead of its huge drop.

An analyst stated that some of the progressing share prices translated into tangible results for the involved firms.

Recently, AMC Ent’s credit rating was upgraded by S&P after it used the Reddit-fueled share offers. The company did this to raise capital and to make a debt restructuring program.