By Alicia K. Gonzales ’09
The information ecosystem of today’s stock markets is changing. Retail trading increasingly affects stock price movements, social media shapes investing trends, and non-traditional entities mediate information. Understanding these shifts requires answering the following question: who, or what, drives investing decisions today?
Sue Guan takes on this question—and many more—in her recent journal article, “The Rise of the Finfluencer” (New York University Journal of Law and Business). According to Guan, “finfluencers,” or financial influencers, are people who have outsize influence on investor decisions, usually through social media.
“It’s important to emphasize that finfluencers, along with retail investors, are significantly impacting the way stock markets function,” Guan says. “Finfluencers and retail trading combined generate these stock price movements that reflect their cultural values and preferences. Information is increasingly disseminated through social media, and almost anybody can become these, sort of, information brokers in today’s stock markets.”
Consider the role retail investors played in the GameStop short squeeze of 2021.
“GameStop’s meteoric rise was such a shocking moment for stock markets,” she says. “For most of 2020, GameStop’s share price was between $4 and $5. But then in early January 2021, as a result of these social media–fueled rallies from retail traders on Reddit, GameStop’s share price skyrocketed, touching a high of $483 per share at one point.”
Guan says these rallies were fueled by several factors, including frictionless zero-commission trading by apps such as Robinhood, fractional trading capabilities, the gamification of investing, the ability to invest in social ways, as well as the desire to squeeze the short sellers of these stocks and punish the hedge funds and Wall Street.
“This moment really made me pause and think, is something fundamentally changing about the way we trade? Or is this just a flash in the pan that’s going to go away immediately and doesn’t matter?” she says. “I try to teach my students the fundamental tenets of market efficiency, many of which have extraordinary explanatory power for what goes on in stock markets. At the same time, I also try to teach them to question those tenets and understand the difference between theory and reality.”
Through it all, her underlying message to students remains the same: retail trading and financial literacy must go hand in hand.
“Many retail investors piled into these meme stocks for the cultural or social implications, or to make a lot of money in a short amount of time,” she notes. “As a result of this meme stock phenomena, there is a growing sense that retail investors can really influence stock markets as well as corporate governance, which has blurred the boundary between finfluencer activity and securities fraud.”
Regulating Finfluencer Fraud
As a result of “finfluencing,” there is a growing concern that finfluencers can influence their followers and profit from their followers’ trading while largely steering clear of securities laws.
“This is because existing securities laws primarily target lies,” Guan says. “The SEC is trying to target deceit or clear manipulative intent. And often with finfluencer activity, it’s a fuzzy question because they don’t clearly share false information, or any information at all. Nevertheless, stock prices still move because their followers are reacting to something about the finfluencer’s behavior, even though there has been no lie or untrue statement.”
Following GameStop and other meme stock surges of 2021, there has been some movement toward holding finfluencers accountable in these gray areas. Guan also cites a district court ruling in the case of In re Bed Bath and Beyond as an example. In this instance, a securities class action was filed against the activist investor Ryan Cohen.
“In that ruling, there was some indication that securities laws might be flexible enough to handle wrongdoing in this sort of gray area where finfluencers’ statements might not be factually untrue, but could still be interpreted as such depending on the context and the particular beliefs held by their social media followers,” she says.
In that case, the court focused on the specific perspective of retail investors and considered the meme stock subculture as well as Cohen’s specific relationship with his followers.
“Viewing materiality from the perspective of a reasonable retail investor opens this potential path forward for the millions of retail investors who have been or might be harmed by finfluencer activity,” she says.
Sue S. Guan is the Albert J. Ruffo Assistant Professor of Law. She has appeared in the CNBC documentary Making of the Meme King and teaches a contracts course and a capital markets and financial misconduct seminar at Santa Clara University School of Law. To access her research on influencers, stock market manipulation, and meme stocks, please visit: https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=3238458