Wisdom of the Crowd?

In his June 21, 2023, testimony before congress, Federal Reserve Chair Jerome Powell referred to the central bank’s view of bank-run mechanics as “outdated.” His comments, which sought to address the events leading up to Silicon Valley Bank’s collapse, allude to the fact that today, the genesis of financial panic is more likely to come from message boards than board rooms. The regional banking crisis is just the latest financial watershed in which social media played a pivotal role. 

The securities finance market is certainly not insulated from the impacts of social media, and in fact, some of the most actively loaned securities in recent years have been those popular with retail investors. Whether it was the GameStop (GME) squeeze of 2021, the downfall of retailer Bed Bath and Beyond (BBBYQ) or the more recent AMC/APE legal battle, social media communities like Reddit’s “Wall Street Bets” have certainly impacted short interest and subsequent lending demand.  

While social media content is generally publicly available, the sheer volume of information in combination with the noise generated by bots and spam creates a challenge for investors looking to derive valuable insights. With this in mind, EquiLend is adding targeted social media sentiment data to its industry-leading Data and Analytics product suite, striving to continually improve its holistic view of the securities finance marketplace. With this new perspective, EquiLend aims to deliver a consolidated view of social-media activity, distilling the knowledge and opinions of the public into easily digestible analytics.  

Social media analytics measuring both the volume of activity and a computed sentiment score will provide decision makers with an additional leading indicator derived from the vanguard of trending news. Additionally, the ability to integrate this data directly with traditional securities finance metrics will provide actionable datapoints for both existing lending activity and new opportunities. 

Looking at the aforementioned GameStop craze, EquiLend analyzed the historical social media data in relation to its securities finance dataset. In the 48-hour period of Jan. 21-23, 2021, social media mentions of GameStop stock increased a whopping 1,600% as the company’s share price began to edge upward. This jump in chatter preceded a 96% increase in the cost to borrow GME during the January 25 business day. GameStop’s share price subsequently hit its record high on January 27.  

While the GameStop story was an international phenomenon (even inspiring an upcoming feature film), retail investors on social media have not lost steam even as the public spotlight has faded. Looking at one recent example, on June 22, 2023, embattled biotech company Aeglea Biotherapeutics (AGLE) announced the acquisition of Spyre Therapeutics in a bid to remain afloat. This has resulted in significant swings in social media mentions and lending activity. AGLE represents just one of many examples where social media data offers valuable context or leading signals relative to securities finance activity.