Will we see a short squeeze on social media moderation? Congress meets on Gamestop today.

Today, the House Financial Services Committee meets at noon to investigate the tumultuous events of January 2021 that resulted in a more than 2000% rise in the stock price of Gamestop and the subsequent banning of small-time investors from the trading app Robinhood (Kailath, 2021). NPR has the run down on who is set to testify and the livestream should be on the committee website.

What happened?

At the end of January, members of the r/WallStreetBets Reddit forum identified that hedge funds were shorting Gamestop stock. According to media reports, these Redditors banded together to buy Gamestop stock largely using the Robinhood investing app. The rest was that Gamestop’s value increased from $1.3 billion to $21 billion by the end of the week and traded as high as $468 (Eavis, 2021). Media reports also note that influencers like Elon Musk facilitated the craze with their own tweets (Steele, 2021). Given Robinhood’s business model, this buying activity led to concerns that it would be unable to complete orders (Reimann, 2021) prompting them to halt trading on Thursday, Jan. 28. They restricted trading to resume on Jan. 29th (Reimann, 2021). As of today $GME is trading at $45.94. At the same time as this trading behavior was halted, the subreddit moderators also took action to shut down the r/WallStreetbets subreddit.

Was this an isolated incident?

No. WallStreetBets also coordinated buying of AMC, Blackberry, and Dogecoin (Reimann, 2021, Kan, 2021). But the broader effect was that Robinhood limited trading on more than 50 securities allowing holding and selling, but not buying.

What’s been the reaction?

Robinhood now faces over 30 class action lawsuits under the auspices of claims that they “steal from the poor” to give to the rich (Kan, 2021) and users are even using automated bot DoNotPay to join the class action (Adamczyk, 2021). MGM has apparently already snagged rights to the story for a movie called “The Antisocial Network” (Mlot, 2021). Today, the House Financial Services Committee will hold a hearing including examining Citadel relationship (MacMillan & Torbati, 2021, Kailath, 2021). The SEC has also said it plans to “closely review actions taken by regulated entities that may disadvantage investors…” and signaled that market participants should be careful to avoid “abusive” or “manipulative trading activity” prohibited by federal securities law (Kan, 2021)

What’s going on here?

Presumably, at the root of this issue is the societal friction between access to trading and wealth building. Apps like Robinhood or Public (disclosure: I use Public) make trading easier and allow for investing in portions of stock with no fees. In fairness, other brokers like Schwab also allow “slice” investments. But these apps have democratized and gamified trading, making it “social.” The secondary issue is a closer examination of the business model of these kind of trading firms that would render the platform to have to shutdown amid large spikes in trading activity and who may or may not have been disadvantaged. We expect the hearing to also address problems with the revenue model around Rohinhood and order-flow agreements. In December 2020, Robinhood paid $65MM to setting SEC charges related to its order-flow agreements (MacMillan & Torbati, 2021)

Is this new?

No. In fact, more than 20 years ago a 15 yr old named Jonathan Lebed faced SEC sanction for using Internet bullet boards and online trading platforms (Pearlstein, 2021). What is new about this is multiple individuals collectively using social media together for the purpose of taking some action regarding trading. But what we don’t know yet is exactly who was involved in the trading and whether or not there was indeed any illegal activity related to that discussion.

How does social media play a role?

We have seen historically good and bad examples of reddit being used for research and info sharing. During the Boston Marathon bombing (Shontell, 2013) and Jan. 6, 2021 Capitol riot social media has been used to identify perpetrators. While useful, many of these investigations have led to accusations against incorrect suspects. Mass moderation of social media content, as we saw with the subreddit take down, is not a new idea. Historically, social networks took individual action based on specific areas of legal violations. The question here is did what happened by organizing on the reddit forums violate law. This is a separate issue from whether Robinhood’s actions to stop trading are legal.

  • We don’t know if this was collusion.
  • We don’t know the identity of the users involved and whether there were inside actors or even the Hedge Fund manager’s participation. IDENTITY is a PROBLEM.

The 2016 election and the Cambridge Analytica scandal was a catalyst for new actions.

In 2018, Facebookt started to remove targeting options that would be discriminatory moderated its policies on “harmful content” focusing on hate speech especially white supremacist content and images, restricting the use of FB to organize events to intimidate or harass people including events with weapons or threats of violence (Sandberg, 2019b). 2019 was a big year for Facebook. They established a Civic Rights Task Force and added Civic Rights training. In 2019 they also reached a settlement with National Fair Housing Alliance (NFHA), ACLU, and Communication Workers of America (CWA) because their ads program was exploited for red lining practices (Sandberg, 2019a) As a result of Cambridge Analytics data privacy scandal 2019 FTC fined Facebook $5 billion (FTC Imposes $5 Billion Penalty and Sweeping New Privacy Restrictions on Facebook, 2019). In 2020, Facebook published an update of their civil rights audit resulting in hiring new roles on civil rights, change policies regarding voter suppression content, launched a Voter Information Center and some moderation changes (Sandberg, 2020) As of March 2020, Facebook had been affiliated with the International Fact-Checking Network (IFCN) (Partnering with Third-Party Fact-Checkers, 2020) and also announced their Oversight Board (Clegg, 2020) to moderate content on its platform.

Moderation effort on Twitter however have been less in volume and more recent. More moderation activity began on the platform regarding election and COVID-19 misinformation. But the big news was in January 2021 when Twitter took mass action to delete 70,000 QAnon accounts and banned former President Trump. In addition, Twitter launched a pilot called Birdwatch to have approved Twitter users flag misleading tweets and be allowed to provide additional context (Collins & Zadrozny, 2021).

We also have seen other evidence of moderation activities. CloudFlare revoked hosting of a forum website called 8chan after it inspired the El Paso mass shooter and the Chirstchurch terror attack (Terminating Service for 8Chan, 2019)

But these actions have been taken after potential crimes, or as a result of legal and regulatory action.

What remains to be seen is whether we’ll see more movement on social media regulation this year in Congress as a result of things like Gamestop or moderation of content shared and organized on social networks themselves.

If you are interested, I and several other faculty members hosted a live talk about the Gamestop issue. Take a listen:


Note: Facebook login required. If the video does not appear, go to the “Discussion” tab.

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