Retail Trading Impacts Asset Prices

Social-media-fueled retail trading poses new risk to institutional investors. This paper examines the origin and pricing of this new risk. I first present stylized facts on prices, quantities, and retail investors' beliefs for a set of meme stocks. I establish that aggregate fluctuations in retail sentiment originated from a growing and concentrated social network. The retail sentiment fluctuations induced changes in investor composition. As sentiment increased throughout 2020 and 2021, retail investors built up long positions, while price- sensitive long-only institutions have gradually exited the market since early 2020. Short interest stayed high in 2020, but dropped sharply following the price surge in January 2021 and remained low for the rest of the year.