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Meme stock trading (MST) began as an investing fad during the shutdown phase of the COVID-19 pandemic among hordes of bored amateur day traders stuck at home, many with "stimmy money" or other COVID-related financial relief burning a hole in their pockets. It has since evolved into a popular trading strategy among retail investors and some institutional investors that arguably has some rationale behind it, despite widespread criticism that it is nothing more than mob rule by underinformed investors. Its enduring popularity, even as financial markets have corrected, has surprised those who thought the fad would fade out as the supply of "Greater Fools" inevitably was exhausted.
Not only has MST persisted, it has infiltrated the realm of highly distressed and bankrupt companies. This was most notably seen in the cases of Hertz in 2020-21 and Revlon in 2022, the former of which was a homerun for retail investors that has likely encouraged more speculation in the equity-trading of bankrupt and near-bankrupt companies, despite an ample body of evidence indicating that this is a losing investment strategy overall.2
At its core, MST deploys the collective power of an army of retail investors to exploit technical supply/demand imbalances in a stock, creating overwhelming demand and driving its price sharply higher. Meme stocks3 often share certain characteristics: They are thinly traded, have a small shareholder base or "trading float," and/or have a disproportionately large short-interest position. These attributes can make a stock especially vulnerable to price spikes when traders collectively swarm it. High short interest can cause price spikes to go parabolic, as short-sellers might need to close out their positions as a stock price moves against them, driving prices even higher. MST is unconcerned with company fundamentals, traditional valuation methodologies or relative value. For example, at the height of the MST frenzy in mid2021, AMC Entertainment Holdings, a beloved meme stock whose business was paralyzed by the COVID-19 pandemic, sported a market capitalization of $31 billion - nearly three times larger than the entire theatre industry's North American box office gross in 2019.
MST and the wild stock-price distortions it can cause have occasionally drawn the attention of regulators and Congress,4 but very little has been done to address the practice, curb its excesses or otherwise...