Why AMC May Be Even Hotter Than You Think

It’s no secret that AMC is going vertical lately:

But this and other meme stocks may be even hotter than they appear based on prices in public markets like the New York Stock Exchange. The reason is a quirk in how retail orders are handled:

The prices of so-called meme stocks may be distorted because the majority of trades in those names are executed away from public exchanges where share price formation occurs, the head of the New York Stock Exchange said on Wednesday.

Meme stocks have a much higher interest from retail investors than most companies. Since retail orders tend to be processed on private platforms, this could have a significant distortive effect on the price reported in public markets.

If many of the trades done by the most enthusiastic buyers aren’t reflected in public prices, this would make the stock seem less desired than it is. So despite AMC’s staggering rise this year, the real enthusiasm may be understated.

In meme stocks, individual traders contribute as much as 70% of the volume, Cunningham said.

The majority of retail orders bypass exchanges because of an arrangement called payment for order flow, in which retail brokerages sell their customers’ marketable orders to wholesale brokers. The wholesalers match the orders internally, trying to profit off of the bid-ask spread, while offering retail traders the best market price or better.

If meme stock enthusiasm is understated, hedge funds trading against the retail hordes should exercise extreme caution. London-based White Square Capital announced plans to close down today after substantial losses in GameStop. Massive losses in AMC and others could cause many more casualties.

The true power of the retail investor may be even greater than it appears.

More on AMC:

Photo: “Hot – canon 550d” by @Doug88888 is licensed under CC BY-NC-SA 2.0

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