WallStreetBets founder Jaime Rogozinski has no qualms comparing the investing frenzy around companies like GameStop, BlackBerry and AMC Entertainment to gambling.
“They’re going with the stock options, knowing that this is a lottery ticket,” Rogozinski told Global News speaking on Zoom from his home in Mexico City.
WallStreetBets is the anonymous chat room on the Reddit platform that is widely credited — or blamed — by commentators for driving the investor pile-up into GameStop and other stocks that have seen wild volatility over the past few days.
Shares of GameStop, a struggling video games retailer, were up more than 1,000 per cent since the beginning of the year on Wednesday, but collapsed from that peak on Thursday morning, before regaining some of the ground lost later in the day.
The stock was trading at around US$248 at 2:55 p.m. ET on Thursday after closing at US$345 on Wednesday.
At the beginning of January, GameStop shares were worth less than US$20. BlackBerry and AMC, among other companies at the centre of the social media buzz, have also been on a breathtaking roller-coaster ride.
The phenomenon has caused more than US$70 billion in estimated losses from Wall Street hedge funds and other short-sellers who’d been betting against the companies that have become the focus of the online chatter. It has also attracted the attention of U.S. regulators and lawmakers.
The U.S. Securities and Exchange Commission said on Wednesday it was “actively monitoring” the situation. And on Twitter, Democratic Congresswoman Alexandria Ocasio-Cortez called out the Robinhood online trading app for its decision to curb trading in GameStop and other volatile stock — a tweet that received bipartisan endorsement by Republican Senator Ted Cruz. Interactive Brokers, another online trading platform, also restricted investing in several social media-driven stocks that had soared this week.
Rogozinski, a fintech worker who founded the WallStreetBets chat group in 2012, says he’s been watching the latest developments as a “neutral observer.” Rogozinski, who says he left the group in April of last year, wrote a book based on the Reddit group, arguing the stock market had turned into “the world’s biggest casino.”
That’s the lens through which Rogozinski sees the GameStop phenomenon. The individual investors who’ve driven the stock rally are gambling, Rogozinski says, “and they’re unapologetic about it.”
Much of the trading is happening via options, a risky financial instrument often used to speculate on price. But Rogozinski says most of WallStreetBets traders understand the potential downside of their trades.
“They know what they’re doing — it’s an all or nothing trade.”
Connecting with like-minded investors with an interest in options-trading was why Rogozinski says he started WallStreetBets, although he adds he has significantly scaled back his active stock trading now that he’s married with three-year-old twin boys.
Stock market manipulation?
Experts are divided on whether the bullish bets placed by traders hanging out on Reddit and other social media platforms amount to market manipulation.
Some argue that investors calling on each other to buy and drive up the price of a particular stock is the equivalent of a social-media-driven pump-and-dump scheme. Typically, traders who create the buzz benefit from the rally because they already own the shares, while investors who buy late into the hype are typically left holding the bag when stocks drop.
Others, however, don’t see what’s happening as a radically new phenomenon or something that threatens the fair and efficient functioning of the financial market.
“Do I think this is a sign of speculation? Absolutely. Do I think it’s just a sign of excess? Yes,” says Brian Belski, chief investment strategist at BMO Capital Markets.
But, he adds, “Do I think it’s going to lead to the downfall of the stock market? No.”
Small investors going after massive shorts is nothing new, he says.
Public social media messages indicate Reddit day traders selected GameStop and other stocks because Wall Street hedge funds had been betting against them through short-selling, borrowing and selling the companies’ stock at a certain price in hopes of buying it back at a lower price to return it and pocket the profit. The stock rally has resulted in a so-called short squeeze, with short-sellers forced to abandon their bets and rush to buy the stocks at higher prices in order to limit their losses. This is something that further fuelled the buying spree.
Belski says he doesn’t see a fundamental difference between small investors encouraging each other to drive up stock prices and well-known contrarian investors going on TV and publicly stating they’re going against a particular short-trade, which likely inspires other investors to do the same.
What it means to everyday small investors
The feverish buying and hair-raising volatility of a handful of stocks don’t mean much for small investors who are focused on long-term returns and hold a well-diversified portfolio, even if the rally includes Canada’s BlackBerry, says investing expert Dale Roberts.
Those who want to speculate on the recent rally should understand that the risk is “incredible,” says Roberts, author of the popular investing blog Cut The Crap Investing and a contributor to MoneySense.
“The emphasis is ‘do it with play money’,” meaning funds you can afford to lose, he says.
And to have any “play money,” he adds, means “you have to have a lot of real money.”
Robinhood said in a blog post later on Thursday it plans to allow “limited buys” in the securities for which it curbed trading activity.
“We’ll continue to monitor the situation and may make adjustments as needed,” the company said.
Canadian trading app Wealthsimple said in a statement to Global News it is focused on keeping its platforms “stable,” amid extraordinary volatility that has reportedly caused temporary outages at serval online brokerages, while noting their systems have been functioning through the chaos.
Questrade, another popular Canadian online broker, declined to provide comment on the recent market developments.
The Ontario Securities Commission said via email it remains “in close communication with IIROC (the Investment Industry Regulatory Organization of Canada about ongoing market volatility.”
The OSC “encourages anyone who is considering buying or selling an investment to first do research and consider getting advice from a registered individual,” it added.
The OSC investigates alleged breaches of Ontario securities law, such as misleading disclosure, abusive trading practices and illegal insider trading. The Investment Industry Regulatory Organization of Canada (IIROC) conducts market surveillance to ensure that trading is carried out in accordance with applicable securities laws.