GameStop, AMC and the New Influence of Alternative Data

Day traders have seized upon out-of-favor stocks like AMC and GameStop and made national headlines, earning quick returns of five and six times their investment. Conversely, these same retail investors have caused some hedge funds to lose hundreds of millions of dollars. Robert Iati, Director of Burton-Taylor’s Market Data Research and Strategic Consulting businesses, offers his analysis on this story that has grabbed the attention of regulators and elected officials alike. What role did alternative data play in this saga? That answer is explained here.

The wild, controversial, day-trader fueled price swings of the past few days in stocks like AMC and GameStop raises typical questions about fairness, fundamentals and financial populism. Surely, the actions of the day traders, the hedge funds, Robinhood, and Reddit will be scrutinized and debated vigorously in the coming weeks. However, I look at this as a great example of the influence that alternative data, in its short time as a tool for traders, can have on the markets.

Two of the most popular types of alternative data are sentiment data and crowd-sourced data, working on the premise that the opinions of a group are generally more influential than that of any one individual, even that of a professional trader. Both are at work in the current controversy.

Boosted by the power of social media, the mob’s positive and negative views about a stock go viral in minutes, shaping the actions of the individuals as well as professionals. In this case, day traders banded together, using social media as their common platform, to drive up the price of underperforming stocks to raise the value of their long positions and undermine the power of the hedge funds that took aggressive short positions in the stocks and drove prices down. Many of those individuals earned 5- and 6-figure profits in a few days, while some hedge funds lost hundreds of millions. It created a frenzy of such magnitude that it led Robinhood and other trading sites to place severe restrictions to curtail trading activity and alerted the regulators to investigate the actions of the investors.

Big stuff, fueled by social media, a.k.a, “alternative data”.

We’ve seen social media influence everything from sales of the latest beauty products to the TV ratings of real housewives to political activism, but this is the clearest illustration of the power of social media to effect markets.

We know that alt data is used in the models of at least one-half of professional traders to varying degrees of concentration, but the shock created by its use here places the importance of alternative data in a new light. Even those of us that follow market data for a living couldn’t foresee the kind of impact that alternative data would have on the broad marketplace. It warrants a reconsideration of alternative data’s place in our financial markets.

Alternative data has gained acceptance over the past 10 – 15 years, such that it is more a core part of the evaluation process than ever before. But to date, while some correlations have been found, many forms of alt data have yet to prove consistently sufficient value to warrant true acceptance and use within portfolio construction models and trading programs.

Buoyed by their winnings and the fresh memory of beating the professionals, we can be certain to see more banding together of the day traders everywhere as they seek to exert greater influence on the markets. What, if anything, will this do to the way data executives and professional traders value alternative data? A high-profile and severely damaging (to many) event such as this can quickly alter their buying patterns. While we can’t predict the magnitude of that change, we can be confident that alternative data just became more important.

Photo Credit: “GameStop (Warwick Mall)” by jjbers is licensed under CC BY 2.0

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Robert Iati is the Director of Burton-Taylor’s Market Data Research and Strategic Consulting businesses.  Burton-Taylor offers unique insight into the Global Market Data Industry. Subscribers to Burton-Taylor’s Market Data research service get access to our library of content including our annual Market Data Benchmark as well as reports covering industry M&A activity and special reports focusing on specific segments within the industry. 

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