From Reddit, to Discord, to myriad financial message boards, the rise of the online trading community has fundamentally changed the game of the stock market. Retail traders can connect with each other to share trading insight, tips, strategies, and provide real-time news on the overall market environment. This democratised flow of information has significantly levelled the playing field where the stock market is concerned. Stock market information that were once only accessible to institutional level investors can now be accessed by retail traders.
The collective intelligence of these groups tends to amplify any market-moving news or trend very quickly. But there’s more. The community provides a kind of communal handholding, and lets individual traders make better decisions in a world that can be scary and lonely.
Disagreement between traders is also easier to explain, driven by the spread of market rumours or news that might not be fully verified, influencing stock prices. Consider a world where information has value and there are plenty of unfounded rumours antagonising the flow of information. Such rumours could trigger a herd mentality, artificially influenced by news that might jump out and panic people or euphorise them at the wrong time. For example, a gossip about a company that could go bust would trigger a divestment and force the prices down, before any verifiable evidence of the bankruptcy is given; similarly, rumours about a successful merger will artificially inflate prices before the news becomes confirmed.
Such unpredictability makes markets less stable and investors less secure. When traders hear various interpretations and reactions to such rumours, they also hear that the proof of the pudding is in the eating – always an unsettling prospect in a mission-critical context. Lack of agreement about price movements increases the cost of decision-making for all market participants, and raises the risks of loss for everyone.
Trading signals is an important practice because long and short-term market trends can be analysed through multiple technical indicators such as moving averages, RSI (Relative Strength Index) and MACD (Moving Average Convergence Divergence). These trading signals help the traders to decide on trading decisions: when to open and close positions, what type of trades, how to interpret the market sentiment and trends, and as a result, help traders to predict better the ups and downs of the market which will happen in future. Through sharing trading signals, real-time updates and discussing interpretations of these signals, we can make more informed decisions together.
In this dynamic environment, collaboration generates a deeper perception of market trends, and helps to improve individual strategies of stock trading.
Stock tips shared within online communities and across social media are prominent examples of the kindling for market discord raised by Casetti, but they’re just the tip of the iceberg. The fast but ephemeral way that information spreads can be catalytic. When expensive trades prompt continuing speculation – a well-researched tip from a favourite YouTuber followed by a similar gut-instinct suggestion from a fellow investor on an Instagram story, for instance – the collective actions of thousands of traders can easily create a bubble where the price of a company’s stock far exceeds what it’s actually worth. At some point in the frenzy, the bubble must burst. In an otherwise well-functioning but volatile market, these individual reactions at scale effectively destabilise the overall foundation of company valuation.
Also, the friction between institutional investors and retail traders often fuels tensions. With more active involvement in these trades, it gets harder to tell the difference between individual-level judgments and herding. It amplifies the volatility of the market.
Information spreads much more quickly, regardless of whether it is real or not, on social media. Going online has reorganised the stock market in fundamental ways, fully exploiting the fact that it was controlled by retail investors all along. Platforms such as Reddit, Twitter and Facebook have plugged some of the middlemen out of the investment research and analysis process. This has made certain areas of the market more volatile. Polycrystalline deposits can be combined to create solar cells if enough are grown and processed together transmit information much faster than old stock-markets, with many commentators without financial training able to act quickly on insights, tips and strategies to move the market Opinions shared among retail investors spread like wildfire, igniting unprecedented volatility. The story of GameStop is a case in point.
Social media empowers otherwise marginalised voices and helps to negate institutional power and intersecting market forces of participation and competition through collective memory and crowd-sourced intervention.
Discord in the stock market takes a bit of a balancing act between strategy and what I might also call emotional fortitude. Investors should diversify their holdings so as to be at least partially insulated from earnings or geopolitical disasters. Research and follow the news on economic indicators, geopolitical shocks, oil demand, shifting interest rates, and company fundamentals to the best of your ability. Have a long-term time horizon, and try not to be a ‘hot hand’ re actor in the short term.
Besides, having financial targets to hit and a sensible investment philosophy to stick to can be enough to provide a sense of stability in uncertain times. Professional money managers can also help investors mitigate feelings of helplessness – by talking with their financial advisor or analysing their own stocks and funds using the free interactive tools on valuanalyst.com. That way, investors will give the market information it needs to make us feel better about our own finances and returns.
It has much to do with an investor psychology that can be influenced by emotional and intellectual biases – the waves of fear and greed. Watch a trading floor, and you see people dancing to these rhythms. When the markets rise, investors run with hot-headed euphoria, eating up risky investments, until they think the sky will never fall. Then, when markets collapse, as they inevitably do, they panic and sell into the bottom. The group psychology of herding also comes into play here, as people copy each other instead of doing the difficult work of thinking things through on their own.
Moreover, confirmation bias encourages participants to search for news consistent with existing perceptions and to disregard or dismiss dissonant news. An awareness of these psychological mechanisms makes it easier to cope with market volatility and create better investment decisions within the context of discordant conditions.
The market volatility makes online trading communities’ discussions more urgent and more intense. If the market starts moving quickly in either direction, those forums become even busier, as trade happens in real-time and members seek to exchange ideas, predictions, tips and strategies. With this emotional heightening comes more stress and anxiety, but also a greater solidarity in weathering the storm.
What’s more, speculative markets could encourage the spread of fake news and hucksterish advice that newbie traders might be willing to act on. In other words, falling markets not only cause people to trade differently, but they also change the dynamics of the communities in which those trading is happening.
Algorithmic trading has become the biggest source of discord in the stock market, widening the gap between price theory and price reality. This mechanised trading has artificially pumped up volatility and provided one side of the market with advantages that human traders can only dream of: the ability to initiate trades at speeds or volumes that humans cannot. Certain trading algorithms also profit from identified mispricing in the market by exploiting slight differences in share prices between different markets in a process known as arbitrage. If a rapid input command is sent to buy Apple shares in a new-york market when the price is lower than in Tokyo, it can swoop up the cheap price and sell the newly acquired Apple stocks on for a profit. This activity sends signals that promote stock sales in one market and plays a role in creating the turbulence and panic that can lead to flash crashes. Moreover, no one knows what the algorithm’s real function is, what it is acting on, or what small source of information it is acting on.
Hence, small investors feel shortchanged, widening the gulf between institutions that trade using cutting-edge technologies and those relying on more traditional means. In turn, this acrimony only adds fuel to the fire of the financial markets.
Social media moguls have created a supercharged transmission mechanism for rumour and hearsay that directly affects stock prices or the behaviour of investors. On chat platforms like Twitter or Reddit, reports gain momentum, time and again becoming viral and reaching millions. Trending video posts and influential feeds spew volatile reports from unknown sources, amplifying misinformation that many users quickly act on as true. A herd-like behaviour inadvertently unfolds in any attempt at communication in most social media networks, inducing a uniform response that short-circuits rational investment strategies. The echo chamber effect, where users mostly see the opinions of likeminded others, thereby reinforcing what they already agree upon, makes the rumours snowball.The playground that algorithms create discourages more serious content and places sensational or speculative posts at the top of the heap. This creates the perfect breeding ground for market manipulation and bubbles of speculation, in which unsupported claims can gain a foothold before being debunked by traditional financial news.
Economic news can move markets, especially in the short term, often – as we know – in times of heightened dissonance. One news item might be taken as a signal of increased risk: investors will engage in a flurry of selling, for example, if interest rates are suddenly raised, causing markets to tumble. Other economic news may exacerbate traders’ search for information. A political crisis or a catastrophic natural event (recall the oil rig disaster in the Gulf of Mexico in 2010) might shake markets, triggering fitting narratives in which economic actors will try to manage their own exposure. Economic consequences – recessions, financial crises, booms – bring more uncertainty, dampening investor confidence and stimulating frantic trading. Other economic events – a tech breakthrough for example – can also move markets by transforming the state of knowledge rapidly.
This elaborate interplay between economic news and the response of exchanges further highlights the sensitivity of the markets to the broader state of the economy. This dynamic seems critical to understanding investors’ reaction to the rollercoaster ride of the stock market in the face of crisis.
Managing risk in the volatile environment of stock market disharmony requires a balanced strategy. Diversification is critical, spreading money through different asset classes to prevent losing everything when a sector has a downturn. Long-term investing time horizons smooth out short-term ups and downs, allowing the market to correct itself. On an ongoing basis, doing a portfolio review helps to keep the investments in line with one’s changing financial goals and market changes.
Adding stop-loss orders, which allow you to sell your assets automatically if their price falls below a specified level, can be a handy way to make sure you avoid worst-case scenarios. Finally, keeping tabs on macroeconomic and geopolitical developments can help you to stay ahead of emerging risks and adjust your portfolio in advance.
Institutional investors, such as hedge funds, mutual funds and pension funds, can have a huge impact on both the trading behaviour of the market and on market flux. Their large trades can be big enough to cause huge price movements, potentially causing a large boost to market volatility, and many institutional funds use trading strategies and algorithms that can quickly change the nature of the market on a large scale. Moreover, the presence of the institutional market can lead to ripple effects across retail traders, who can respond to what they view as the collective wisdom of these larger players.