The stock market is having a sleepy trading session Tuesday ahead of Wednesday’s critical inflation data. But in the more obscure, speculative corners of the investing world the casino is rocking.

Meme stock darling GameStop Corp. is up 171% in just two days, and beleaguered movie theater chain AMC Entertainment Holdings Inc. has soared 135%. Over 1 billion AMC shares have traded on Monday and Tuesday, compared with 24 million on Friday. Meanwhile, GameStop’s volume is over 340 million in the past two sessions, up from roughly 37 million on Friday.

For its part, the S&P 500 Index is basically unchanged since Friday and its volume in Tuesday’s session is 21% below its 20-day average as investors await Wednesday’s crucial consumer price index data.

The mania, which has spread to many of Wall Street’s most hated stocks, has shades of 2021’s meme stock craze, when cooped-up individual investors railed against short-selling hedge funds on forums like Reddit Inc.’s WallStreetBets and the chatroom StockTwits. But that was three years ago. Wall Street has since gotten privy to how these “Reddit Raiders” operate and created a blueprint to profit.

Strategies that use algorithms to capture price momentum are now better positioned to jump on these rallies before they go mainstream. They can even add a little juice to the surges.

“A part of the industry is much more well-prepared for meme rallies and to take advantage of those meme rallies than when they were surprised three years ago,” said Don Steinbrugge, head of Agecroft Partners, which helps hedge funds raise money. “They want to get in on the beginning of the price movement, and they want to get out before the price collapses. They basically want to front-run the buying and selling of retail investors.”

Casino Abuzz
The latest chapter in the meme-stock craze began with a single cryptic post on X Sunday night from Keith Gill, the retail-trading icon who goes by the moniker “Roaring Kitty” and drove the original mania before disappearing from social media in June 2021. By early Monday morning, the market casino was abuzz with amateur and professional investors placing bets across the speculative world.

Trading data from providers that cater to individual investors seems to validate Wall Street’s role in the latest move. Since Gill’s tweet went viral, users of Fidelity’s platform have actually placed more sell orders than buy shares, the company’s website shows, something that didn’t happen during the 2021 stretch when individuals were overwhelmingly net buyers.

Investors that have been nimble — and lucky — have seen massive gains. But others who embrace the “HODL” motto, short for “hold on for dear life,” are still in the red. GameStop is roughly 60% below its 2021 intraday peak while AMC is down 98% from a high. The massive paper losses could be a reason for some to finally cash out, according to Dan Egan, vice president of behavioral finance and investing at robo-adviser Betterment.

“There’s a very different, latent set of retail traders waiting to see certain price points just to sell out which we didn’t have last time,” said Dan Egan, vice president of behavioral finance and investing at robo-adviser Betterment. They dynamic could drive the cycle of the trade, he added.

A smattering of social-media personalities have helped draw in uninformed retail traders to the casino, furthering the notion that trading meme stocks is just a form of gambling.

Barstool Sports founder Dave Portnoy has resumed his “Davey Day Trader” livestream, and on Tuesday morning talked about buying $500,000 worth of GameStop and AMC. Influencer Andrew Tate, who is charged with human trafficking, rape and forming a criminal gang to sexually exploit women, is constantly posting on X about buying GameStop. And social media influencers that were accused of orchestrating a pump-and-dump scheme have reawakened some of the animal spirits around AMC.

Meme Risk
Strategists like Egan warn retail traders to not buy stocks based on memes. Especially because the very groups touting shares are likely to quietly cash out while everyone else is buying.

Then, there are the trading platforms such as Robinhood Markets Inc. and market-making firms like Citadel Securities that will profit either way. Robinhood’s commission-free trading is partly driven by its ability to make money through transactions in what’s called payment for order flow. The money maker is controversial because brokerages get paid by market makers to route orders through them, rather than directly to stock exchanges.

Those market makers and brokers can make even more on equity options contracts given bid-ask spreads are typically wider than those on regular stock trades. Meaning the firms throughout the cycle of completing trades can profit handsomely from a boom in volume, regardless of how the companies do. So the soaring activity in GameStop and AMC, paired a boom in trading of options tied to both companies, means the market makers and options brokers are sitting pretty.

Not everyone is making money, however. Investors sticking to short positions in the meme stocks are facing more than a billion dollars in paper losses. That said, those numbers pale in comparison to the pain from three years ago that resulted in the implosion of firms that ran against the trend, like Gabe Plotkin’s Melvin Capital. This time around, most hedge funds are adopting strategies to limit their exposure.

“A big change since last time is that a number of managers have changed their risk controls on the short side so they won’t get burned as bad,” Agecroft’s Steinbrugge said.

This article was provided by Bloomberg News.