Influencing the Markets: The Motivation of Social Media Influencers

Social media influencers have become an increasingly important presence in the financial markets in recent years. These individuals have amassed large followings on platforms such as Reddit, Twitter, Instagram, and YouTube, and they use their influence to provide investment advice and insights to their followers. Some social media influencers specialize in specific areas of the financial markets, such as options trading or cryptocurrency investing, while others offer more general advice and market commentary.

While social media influencers are supposed to provide valuable information and insights to investors, it is important for investors to approach their advice with a critical eye. Not all social media influencers are experts in the financial markets, and some may have conflicting interests that could bias their advice. Additionally, social media influencers may not have access to the same level of research and analysis as professional investors, which could limit the effectiveness of their strategies.

Reference [1] discussed the motivation of the social media influencers in the financial markets, i.e. the so-called “finfluencers”. The authors pointed out,

First, finfluencers are not solely motivated to seek out fundamental value information and trade to profit off of it. Instead, they try to maximize popularity, be entertaining, and “grow their brand,” among other motivations. Because they mediate the information that reaches retail investors and provide powerful coordination mechanisms across those investors, finfluencers’ influence shapes the types of “information” and motivations that are reflected in stock price movements. Second, the more influence finfluencers wield, the more they can predict and even control trading patterns among their followers. From a finfluencer’s perspective, stock price movements can become more predictable,which can weaken finfluencers’ incentives to provide valuable information to their followers and make profiting at the expense of their followers more tempting.

In short, social media influencers in the financial markets are mostly motivated to maximize their popularity, be entertaining, and grow their brand.

The article’s conclusion is consistent with our experience. We have observed that many financial service providers on Twitter are focused on amassing large followings. These providers often use social media as a platform to advertise their services and promote their products, rather than sharing insights about the financial markets.

The article also concluded that social media influencers can limit the effectiveness of the non-arbitrage principle,

Finfluencers can make it harder for other traders to eliminate price differentials caused by nonfinancial trading reasons, which they could otherwise do through arbitrage. As it becomes more difficult for other traders to arbitrage prices because finfluencing makes those prices more resistant to informed trading, prices reflect even more nonfinancial, finfluencer-driven value. As others have noted, impact is greatest when coordinated.

This is an interesting finding, as it suggested that efficient markets can break down in the presence of social media influencers.

Let us know what you think in the comments below or in the discussion forum.

References

[1] Guan Sue, The Rise of the Finfluencer (2022). New York University Journal of Law and Business, Forthcoming, Santa Clara Univ. Legal Studies Research Paper No. 4400042, https://ssrn.com/abstract=4400042

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