Take the stock of original memes,

GameStop

(ticker: GME). Its short interest rate, which is basically the amount of shares sold short by bearish investors relative to the total amount of shares available for trading, has been above 100% at times in the past.

The GameStop share was severely shorted as its business was eroded by online options. Comparable store sales fell nearly 20% year over year in 2020. Things were getting tough for the retailer with more than 5,000 locations.

Then GameStop’s posts started appearing on social media, presumably in an attempt to create short squeeze. This is when short sellers need to hedge bearish bets to limit losses. Covering shorts requires more buying, which pushes the prices even higher. The compression was, for the most part, successful. GameStop stock is up about 4,700% from a year ago, crushing the returns of the

S&P 500

and

Dow Jones Industrial Average.

GameStop’s market cap is now around $ 16 billion, roughly three times the market cap of

Macy’s

(M). Following the squeeze, articles were published on how hedge funds and short sellers were defeated by small retail traders.

Some hedge funds may have felt the pain, but given the volume of GameStop stock trading, it’s unlikely that many of them were fatally injured by selling the stocks short.

And what about the volume? Over 20 million GameStop shares can be traded in a day. There are less than 80 million shares outstanding. That’s a quarter of all the stock there.

Apple

(AAPL), for comparison, trades around 120 million shares per day. There are 16.7 billion shares outstanding. This equates to 0.7% of stocks that change hands each day.

Memes stocks are not pump and dump stocks, however. Traders believe in stocks even. Pumping and emptying is something else.

The pump and dump patterns, which have been around forever, are where a trader with nefarious intent slowly buys a position in a tiny, thinly traded stock. Then the investor tries to convince other traders that good things are about to happen. The holder then sells the stock as further purchases drive the price up. New owners ultimately find themselves holding the bag when the purchase dries up, and the promised good news turns out to be overly optimistic.

Overall, the pump and dump stocks are: lightly traded, have no sales, do not have high short-term interest ratios, do not have analyst coverage, and have small market cap – less than $ 1 billion.

GameStop, for example, is covered by four analysts who produce a steady stream of research on Street, and stocks are in portfolios that track things like the

Russel 2000

Small cap index.

RAPT Therapeutics (RAPT), however, is not either type of stock. It is biotechnology. There are dozens of small biotech companies that have small caps and whose stocks are marked by volatile trading. Small biotech tends to be all-or-nothing. Either a drug or a patent works or it doesn’t. Small biotechs also have limited liquidity to investigate, perhaps enough to research a drug for an application.

In the case of RAPT, the company announced two things: positive data a skin disease trial, as well as a sale of shares to raise about $ 125 million. Positive data is, well, positive. And more money means more penalties for his potential drugs. This is why the stock has increased.

Volatility in trading can be caused by several different factors. Typically, volatility is partially activated by commission-free trading which makes it easier to trade entry and exit of any moving stock.

The ultimate role of free trade in memes, pump and dump programs, or biotech stocks is another story.

Write to Al Root at [email protected]