Surrounded by rallies of “power for the people”, a group of misfits recently brought Wall Street to its knees with a dazzling display of disobedient investments that shot Gamestop stocks at Moonward. This unprecedented seizure of power by the proletariat was widely praised as a slap in the mouth for the establishment. Some say it is a warning shot for the financial kings and queens of the earth.
The legend of “Gamestonk” will be told for many years to come – Hollywood is already taking care of that. But the story is far from over. As every fan of epic cinema knows, whenever there is new hope, you’d better believe that the Empire will strike back.
I’m not being subtle here because the story is pretty simple: rebel investors are beating Wall Street at their own game … this time. If you need an explanation of what happened, here is a detailed explanation.
Here are the bullet points:
- Gamestop is a failing company.
- Big league investors use a technique called shorting to make money on failing companies.
- A group of Redditors decided Gamestop stock was undervalued and invested in it.
- Big league investors lost money because Gamestop stocks rose in value rather than depreciated due to the sudden surge in investments.
And here is a brief description of TNW’s Ivan Mehta short stock:
A vague definition of shorting is betting against a company in the stock market. Shorter borrowing a company’s stock from someone, selling it to another investor, and waiting for that stock to go down. Then the shorter ones will buy them back for a lesser amount, return those stocks to the borrowers, and keep the difference.
The big thing here is that the Redditors know that Gamestop stocks are basically worthless. The company is failing and is unlikely to thrive under its current business model. Why did people (not the hedge funds) choose to throw their hard-earned cash on a failing stock?
The answer is, it’s not really about gamestop. They found out that big leagers shorted it out and found a way to legally take advantage of this to make some cash. We are also talking about big money. An investor has converted $ 50,000 into over $ 40 million (as of two days ago).
In response, financial institutions (including the app most Redditors used to trade, Robinhood) blocked more investors from buying new stocks. That seems like a rather small reaction, especially considering that hedge funds lost about $ 5 billion (yes, that’s billions with a “B”).
How do hedge funds and financial institutions fight back other than leaning on the scales and / or paying the US government to make laws appropriate for a big league? The answer is to stay one step ahead of these rallies with brute force AI.
A team of researchers from the University of Göttingen recently converted an algorithmic approach to combating fake news into a method for detecting online market manipulation.
According to a press release from the university:
In order to identify incorrect information – often fictitious data that makes a company appear in a positive light – the scientists used machine learning methods and created classification models with which suspicious messages can be identified based on their content and certain linguistic characteristics. “Here we look at other aspects of the text that make up the message, such as the intelligibility of the language and the mood the text conveys,” says Professor Jan Muntermann from the University of Göttingen.
The relevance here is that Gamestonk did not emerge as a result of small investment firms battling their bigger cousins. Gamestonk was a meme on a message board.
Hedge funds are the result of market-minded companies throwing enough money around to get rich on the margins. Gamestonk was a head-to-head attack on this strategy and a disaster-level event for all members of the hedge fund community.
The big thing is that the collective will of the online financial meme community poses a serious threat to hedge funds and other areas of the market that can be influenced by large groups of investors and whales almost equally. Traditionally, the “little person” has not had the ability to influence the market that quickly, but real-time, immaculate, automated trading apps have shifted the balance of power to who can get the word out the fastest.
And this is where the AI comes in. In combating fake news, AI systems look for keywords and phrases and then flag them for human investigators.
The problem with this approach, especially if you want to apply it to the search for “fake news” used to manipulate markets, is that those spreading the message can easily identify which keywords and phrases the AI is using trigger. Once they know what the machines are looking for, they can remove and replace those words and slip past recognition.
The work of the Göttingen team attempts to thwart this type of effort by looking for the semantics and context that surround the phrases and keywords that identify a post as a fake message. In other words, the AI looks for telltale signs of false statements as well as the statements themselves.
It is important to understand that in something like manipulating the Gamestonk market, when we talk about “false news” we are simply referring to the meme that Gamestop was “undervalued”. The usefulness of such a system would be to expose memes and call-to-investment as they appear on social media so that hedge fund managers can adjust before the markets are manipulated. This could result in counter-shorters losing their entire stake while the billionaires “regulate” the market again.
You can read the whole paper here. While it isn’t specifically targeted at situations like Gamestonk, it’s easy to see how it can be used to get rid of such tampering as quickly as possible. It may feel like a game of cat and mouse right now, but when billionaires shoot back, they tend to use every possible method they can.
Wall Street has entered the meme wars and brings AI to the party.
Published on February 1, 2021 – 20:07 UTC