Trish Regan: Oh, have you been following the whole WallStreetBets thing? Well, they just had another hearing on Capitol Hill about it, and everybody’s getting really nervous. They’re questioning whether individual traders are getting maybe too much power.
I don’t think that’s possible, right, because I think in a fair market system you actually need a lot of people involved, and the more people, the more efficient it is because you have more brains effectively making decisions about which companies are going to work and which companies won’t.
Hello, everyone. I’m Trish Regan. Welcome to American Consequences With Trish Regan. I’m so excited because we have here today the guy who founded WallStreetBets, the guy who is sort of the igniter, if you will, of all of this and this sort of rise of the individual trader. Again, I love it because I think individuals should have a voice in all of this.
There are a lot of questions as to whether there was market manipulation, whether market manipulation can happen, and whether it could actually bring down the entire system. He has a lot of thoughts on that, so I want to get to none other than the founder of the Reddit forum WallStreetBets back in 2012, Jaime Rogozinski. Jaime, welcome.
Jaime Rogozinski: Hi. Thank you very much for having me. It’s quite a pleasure.
Trish Regan: Well, I’m really excited to talk to you because this is just amazing. It’s incredible what happened, and I think that the ramifications are still being felt. There’s hearings, as I said, going on, on Capitol Hill, today even. And everybody’s trying to get to the bottom of whether or not WallStreetBets really did influence the market in ways that jeopardize, effectively, the entire system.
But let’s start at the beginning because you founded this in 2012. Is that correct?
Jaime Rogozinski: Yeah, that’s correct. I started it in 2012, in January 2012. Basically, I was single at the time. I had a good job that left a decent disposable income, and I had my retirement plan and all that. But I also had extra money that I wanted to put to work in a more aggressive fashion and looking for a place where people don’t mind taking more risk and getting more reward.
It was just hard to find places that weren’t professional traders that would accept you and people that would just take a laidback approach towards things. Even picking individual stocks is considered very risky for most investors. And so I just created this forum.
Trish Regan: Just to talk about it and share ideas?
Jaime Rogozinski: Yeah.
Trish Regan: So you’re sharing ideas, and people are – how technical would they get? What was the level of sophistication then, and would you say that it’s still sophisticated at some level today? How has it evolved?
Jaime Rogozinski: It’s evolved for sure, and it’s been fascinating to watch. What was attractive about this community is the fact that you had a lot of people that were like me that wanted to learn and that wanted to put their money to work and that didn’t mind taking these risks.
And then you also had a lot of people that were actual professionals, and anyone that considers himself a professional trader knows that it’s a lot of downtime. You’re staring at the screen a lot, and it’s really quite boring if you’re doing it correctly.
So these guys found this forum where people are joking around and they’re embracing risk, and so they were interested, too. So we had a combination at first of professionals and amateurs, and together they would share knowledge and a lot of people would be learning.
That holds true to today, but I think that a lot of the emphasis has changed whereas, when the subreddit started, you had a lot of people that were interested on the technical standpoint and, “What is this chart formation?” with technical analysis and understanding what happens when you buys stocks or stock options.
And today what you have is you have some of that, but you also have – you had such a trending market for the past 10 or 12 years where people really mostly want to say, “Well, which direction am I going to buy? Are the stocks going up or down?” And they’re betting in that direction and not caring as much about the technical standpoint, but still sharing a lot of ideas.
So it’s still very sophisticated. In fact, a lot of the things that we’ve seen over the past couple years have been from very creative and extremely sophisticated investors with a really high appetite for risk.
Trish Regan: Some people have said to me they wonder how much the hedge fund community itself is actually now monitoring these chatrooms so that they can – and perhaps even influencing these chatrooms because they – given what just happened.
Let me go back to what happened. By the way, did you buy GameStop? Were you a GameStop investor?
Jaime Rogozinski: I was not, no, because I’m living in Mexico right now. It’s hard for me to send money back and forth between my U.S. broker that would allow me to buy stocks. And so for me, I tend to trade more index futures and foreign exchange.
Trish Regan: I love that. The founder of WallStreetBets is now trading index funds. By the way, I love index funds, I really do. I always have, and low cost. I’m all about it.
But anyway, it’s fun – I get it – to look at individual stocks, and there’s quite a ride there both up and down. At some point you mentioned that people started to get away from the technical aspect. Clearly, they were not interested in the fundamental aspect, either, in terms of earnings and simple things like price-to-earnings ratios, etc.
At what point did that divergence begin, or was that component, do you think, always there?
Jaime Rogozinski: There’s always been a bit of a fundamental component of it with people that are trying to understand the structure of certain things. So you will have certain people that will make these educated long-return trades based off some level of analysis.
But for the most part, they don’t really care about that. They know that they don’t care about that, and they’re open about it. It’s not like they know – it is not like they are unaware that fundamentals exist. They’re aware they exist, but they’re questioning the relevance because the movements, at least short-term movements, in the stocks don’t tend to really map directly to fundamentals.
If you have a long-term time horizon, then it does. But these guys are mostly trading and buying and trading within a couple of hours or days, and those big fluctuations aren’t explained by fundamentals. They’ve proven to be right with the irrelevance here, right?
GameStop is a great example with what it’s trading at today, but there were examples even before then where they went for Hertz, for example, when they declared bankruptcy. That’s very questionable fundamentals for that company, but when they started buying that up it was at $2 a share, and by the time they lost interest it was at like $5 a share. So they’d more than doubled their money within a couple of days. And to them it’s not relevant, and they’re aware of that.
Trish Regan: So let me get into GME and what exactly happened there, because it felt like all of a sudden things became political, right? People had just come off the election. There were a lot of people that were sort of angry. There were a lot of people that were at home and maybe had some extra stimulus money.
Everybody started investing in the market. They talked about it being this army, right, of individuals that were sort of telling the establishment to eff off, if you would. Is that how it felt?
Jaime Rogozinski: Yeah. I think it started off – most times that you see something happen on WallStreetBets that gets a lot of attention, it starts off with somebody trying to make some money. That’s what everyone’s there for at the end of the day. They’re there to have fun. A lot of people lose money. People make money.
And this got started with one individual that had this thesis about GameStop. He’d made this analysis and he’d taken this bet some time ago – I believe it was in the summer of 2019 – and he was holding onto this particular trade.
And then the stock started going up. He starts making a lot of money, and he starts getting a lot of visibility. A lot of people buy into this idea, and they start buying up GameStop a lot and they start buying up a lot of stock options with GameStop.
The stock starts going up astronomically, and this gets the attention of a lot of people… the media, the politicians. It started creating this feel of these individuals being able to really empower themselves.
Now, on the other side of this trade, which is why I believe it made an interesting story, was… you had hedge funds, large hedge funds that were shorting the stock, meaning that they were betting that the stock price was going to go down.
Historically, people that do short sales or funds that short sell are kind of frowned upon because they are – well, the argument is that they’re destroying value. By shorting the stock, they’re suppressing the price. They’re reducing the size of the company and the value of it, and that can eventually translate into jobs and things like that.
So while these guys started making a lot of money, they were actually forcing the hedge funds to start losing money, and that’s what became interesting. I believe that that’s when, all of a sudden, you had this resurfacing of pent-up feelings from Occupy Wall Street, when we had the 99% thing, that it’s not fair that the 1% and the hedge funds and the banks, and all of a sudden… and nothing really happened with that movement.
And all of a sudden now, they’re realizing, “Ah, this is a good way to level the score. We’re still angry. We still remember what happened. Yes, we’ve recovered, but nothing ever happened.” All of a sudden there was this component that, yes, we had – not just in the U.S., but all around the world – we had a lot of people celebrating the little guys being able to beat the big guys.
To me, what was also really surprising was we had the politicians on both sides of the aisle. We had Ted Cruz retweeting AOC, both of them saying, “Hey, power to the little guy.” So it was very, very fascinating to watch.
Trish Regan: Let me ask you about that, and full disclosure, at the time I was like, “You know what, this is more complicated than Ted Cruz and AOC want to make it.” It’s more complicated because, you know what, shorts actually do play a vital role in the overall functionality, right, and the price determination of stocks in the market.
You need to be able to short just to really have an ease of transaction, right, to have liquidity in the marketplace aside from what you were talking about with the hedge funds that are making these big, giant shorts. But it’s just part of how the market functions, and you need people to basically be able to lend the shares out if you’re even going to buy them in the first place. And so it’s part of an overall environment.
And so I look at it, and this idea of the little guy and the big guy, I don’t know, maybe I’m missing something. I don’t think it’s that simple.
Jaime Rogozinski: No, it is a whole lot more nuanced than it appears from the onset. I think politicians tend to simplify things into soundbites, and that’s really where they get their soundbite from.
But I agree with you. I do believe that short selling has a vital role in providing liquidity in the market. It provides the ability to do price discovery, which is arguably one of the most important components of the stock market.
There are lots of benefits, but it’s also – if you want to talk about the little guy and the big guy making money, some of these hedge funds that were losing a lot of money have the pensions of nurses and firefighters.
Trish Regan: Exactly, I’m so glad you said that. Exactly.
Jaime Rogozinski: So it’s not the little guy versus the big guy. It’s very circular. And then you had hedge funds that got smart about this, and they realized what was happening. They decided to hop onto the other side of the trade, and I forget what the names of the two funds that made something like $700 million from this.
It is a lot more nuanced, right? The short sellers aren’t necessarily bad guys. The hedge funds aren’t necessarily big guys because they’re controlling the money for the little guys, and the little guys are just trying to make money, too. And the little guys like to short the stocks as well.
Trish Regan: It’s this weird cycle. I love that you have an economics degree, by the way. That’s your background. Put on your economics hat for a second. Given this sort of incestuous environment, right, where it’s all feeding upon itself, what do you think?
I remember one person at the time told me he had a friend that was investing and had made, I don’t know, tens of thousands of dollars on GameStop in the last week. I was like, “Sell. Get out. Get out. Sell now.”
I would have to think as much as that crowd and that Occupy Wall Street crowd, as much as they had an agenda, at some point some of them have got to be saying to themselves, “Oh my gosh, I just made more money than I made all last year.” It is time to get out, right, because who the heck wants to lose all that?
Do you think that it actually forced any market discipline into even people who just thought that this was a political statement?
Jaime Rogozinski: Market discipline isn’t something that’s in the vocabulary of this particular demographic. I get a lot of questions sometimes: “Well, is this a bubble or not a bubble?” They’re going to be left holding the bag, and these concepts don’t apply to this demographic of traders.
They don’t care if there’s a bubble because then they’re going to switch from buying calls – these are stock options that bet that the price is going to go up – to buying puts, which are the stock options that bet that the price is going to go down. And they have done this before. They did this in March of 2020.
I’m not sure that there’s much discipline. The appetite for risk is so high, and the leverage is so high once again specifically with stock options. They’re buying these little scratch-off lottery tickets. They’re making tons of money. Lots of people are losing money. Let’s be fair, it’s kind of a zero-sum game. And that’s kind of how it goes.
Do they take some money off the table? Yeah, I’ve seen a lot of examples of that happening, even before GameStop, where some individual takes $1,000 and overnight turns it into $100,000. They realize that this is not something they can replicate. They take most of that money off the table, and they continue to trade with whatever they have left over to see if they can replicate it.
The millennial generation, they saw what it was like in 2008 when they lost – when they graduated college with student debt, and they couldn’t get a job. Maybe their parents lost their job or even their house. The millennials overall have less homeownership and have less net worth than Generation X or the Baby Boomers did when they were this age.
And so they’re kind of looking for a way to get out, and they figured out a way to do that. Not everybody, but a lot of people do and have made enough money so that they can buy a house, put a down payment for whatever, put a nice little nest egg or retirement.
Trish Regan: Oh, those are the good stories, yeah. I guess what I’m sort of getting at is I just feel like market forces or human nature at some point has to kick in where they’re going to say to themselves, “You know what, I did pretty well on this. I may have had a bit of an agenda, and I wanted to stick it to the big guy. But at some point, I’ve done OK. I’m going to cash out.” And then those that are left clinging on because they have this agenda may wind up losing it all.
I guess where I’m going is… what you’re telling me is that they’re not governed by necessarily the same sensibility that you traditionally see in the marketplace. And so I would take that a step further then and ask you: Do we have a problem? Is this actually dangerous to the integrity, if you would, of our market system?
Jaime Rogozinski: That’s a great question, and it’s one that’s been fascinating for me since 2012 when I started learning about these things. It was the inspiration of the book that I wrote, and it is something of a divergence.
I’ve seen references to Wall Street being a casino as far as Google would let me go back. I’ve read books that were based in the early 1900s that were already referring to the stock market as a casino. So there’s nothing new at referring to it as a casino.
I think that what draws a lot of attention is nowadays you guys are actually treating it like a casino. Instead of it being an insult, “Ha, those big banks are treating the stock market like a casino,” these guys are like, “Absolutely it’s a casino, and it’s a lot of fun.”
But there’s been a lot of things that have been more progressive throughout the years. The stock market started because companies that want to grow have a way to raise additional capital so that they can reinvest it into R&D or growth or whatever, and that translates into more jobs and a productive economy and just stimulating the overall growth of a country or an economy.
That functionality has been kind of diverging slowly for a long time. You had a lot of businesses that don’t go public because they need the money to reinvest. Then you have companies that take private investment before going public through venture capital or private equity, etc., and then they go public in order to repay the investors that were there before. So now going public is really a cash-out opportunity.
And then you have something even weirder that’s been taking place this last year where you have companies that are not actual companies. These are called SPACs. They’re really popular. They’re coming out on a daily basis like crazy. These are companies with no offices, no employees, no anything other than just, “I have an idea. Give me your money, and I’ll see if maybe I can make it happen.”
Once again, it’s already diverged a lot. The ETF market is another really interesting one that I am fascinated by. So you’ve already had this disconnect that was already there for a while.
The biggest difference is because now we also have a lot of access to the market through free brokers, meaning no commissions, no minimums, instant funding, fractional share purchasing, meaning you can buy just little, small pieces of a single share.
Then you have these individuals that, with very little money, they can participate and do the same things that the banks previously could do, such as buying mortgage-backed securities, such as buying collateralized debt obligations.
Trish Regan: See, I think that’s good, Jaime. I look at it, and I’m just a red-blooded, free-market American capitalist. So I look at it and say, “I want this democratization. I want people to make individual decisions.” It doesn’t all have to be some fancy-schmancy hedge fund type, right? You should be able to invest in a CDO if that’s what you want to do.
Jaime Rogozinski: Yeah, and that’s the beauty of it, is now you don’t need to have the middleman, the big banks and the big institutions – or even big money, big barriers of entry, in order to participate.
So people are getting educated about these things. People are learning. They’re becoming engaged in it. Maybe they don’t care about the fundamentals, but while they made their bet, they’re certainly looking for things to keep their mind busy.
Maybe they’re looking for some, what do you call it, self-fulfilling prophecy information that can back up their thesis. And they go, “Oh, let me read about this company’s plans, and let me read about the weather to see if that’s going to affect the crops for whatever.” And all of a sudden, they’re engaged.
Returning to the idea that the markets have a very important function of price discovery, well, now you’re actually having more participants adding more liquidity, and very sizable amounts, that are actually making this process – well, in theory – more efficient.
Trish Regan: And this is my belief, sort of. More players make it more efficient, and people have personal money at stake, etc. I would think that the more people you have in there, the more efficient it would get, and therefore the better the market.
So when people have said to me, “Oh, GameStop. Reddit users are manipulating the market,” I’m like, “I don’t know.” Again, maybe I’m missing something.
I feel like the market, in a real free-market scenario, and we can talk about that in a second given that you couldn’t trade GameStop because of various reasons, and we’ll get to that in a second. It wasn’t entirely free in that sense.
But in a real free market, decisions are being made every single second that should theoretically be pretty efficient in the long run. Do you agree with that?
Jaime Rogozinski: Yeah, absolutely. And the efficiency is coming from having a lot of transactions and having a lot of participants. The idea of price discovery, the idea of discovering what something is worth, by the invisible hand once again in economic terms is by actually having a lot of people with a lot of voices and a lot of them coming to consensus.
When you only have two participants, then that information is very limited. When you have millions and millions of them, then that information becomes much more abundant, and the democracy of deciding value and prices becomes more legitimate.
Trish Regan: We’re on the same page with that. OK, so let’s get to what happened with Robinhood. And maybe I’m a little jaded because I’ve never seen the trading environment really for anyone – and I got my start on a trading floor. Actually, if you want to go way back, you just mentioned weather reports.
My very first time in an investment bank, I was in school, and I had a temp job transcribing because I could type fast. All those years of piano paid off. I could type fast the transcription of the weather report – you’re down in South America and Mexico right now – in Costa Rica or something or in Peru because people were trading crop futures.
So it goes back. It was like 20 years ago. But anyway, the point being that I have actually had real experience as well in working on the emerging market desk at Goldman Sachs.
Look, they’re going back and forth all the time, right? It’s kind of like, “Are you first in line for the trade? Are you second? Are you third?” I guess I’ve just always assumed when I’m trading as Trish Regan, as an individual, I’m not first in line, and I hope – when I place my bet, so to speak – I hope that that transaction gets transacted at the best possible price for me.
But I kind of go in with a grain of salt knowing that I don’t have the same rights as, say, if I were a big institution, and even that institution is not necessarily first in line because another institution may be ahead. Maybe I’m just a little too jaded. I wish it was a little bit better.
But I guess one of the things that some of these GameStop folks didn’t entirely get right, was that – and maybe it wasn’t fair, the way it was presented –was there are things like margin calls, and Robinhood faced them.
Jaime Rogozinski: There’s a couple of things here. When we’re talking about being first in line, you’re talking about a practice that’s called front-running, right, where you have bigger people that get in line and they get a slightly better price. That’s something that’s been happening forever, but it’s also something that’s not relevant.
They’ve just identified this new niche, this new strategy for the market that doesn’t care about this execution, timing. High-frequency traders, the computers, they care about being collocated because that millisecond matters to them because that’s part of their strategy.
These guys don’t care how long it takes, and I’ll argue they don’t care if they’re getting the second-best price. I will even argue that they don’t care if you tax that individual transaction. Well, take GameStop for example. This guy, Keith Gill, took $50,000 and turned it into $50 million.
Trish Regan: Amazing.
Jaime Rogozinski: Do you think he cares about $1 or $2 that he got stiffed on? No, he doesn’t. Their approach is much different than these more technical approaches, which resemble more the technical traders that care about these little cents, the spread between the bid and the ask. All those things don’t matter with this particular demographic.
But the second part is something that is more relevant, right? What ended up happening with GameStop where brokers, Robinhood, but not just Robinhood, a lot of them had the same issue. There’s mechanics behind every time you buy and sell things that are in place.
A lot of them have been in place for many years from back in the day when physical stock certificates had to be moved from one exchange or brokerage to another, and they had to take it by horse. I have no idea how they did it, but it would take time.
Nowadays we still have these two-day settlements between the time that the money can go to the buyer or to the seller and the stocks can be given to the other party. During that in-between time, somebody has to put up collateral just in case.
All that mechanics of things, it was never designed for having such ridiculous amount of volume with such crazy volatility, and so things kind of started breaking. The wheels kind of started coming off a little bit, and that is a systemic risk which is, as far as I’m concerned, one of very many that are in play right now.
I said in my book that in 2008 we had – the lessons learned were banks now perform these stress tests to make sure they can withstand an additional liquidity crunch. I don’t believe brokers have had the proper stress test to withstand the stampede of high-risk traders that aren’t afraid of margin calls.
That’s putting some risk at play, and I think that that’s going to hopefully lead to bettering the system a little bit and renewing it a little bit. We have the technology in place that things could be done instantly and can address this without affecting the functionality of the market.
Trish Regan: So that’s interesting. Not affecting the functionality of the market is really important. You want to make sure that things are more fair, not less fair. Sometimes when we talk regulation, and again this is my own free-market bias, I just think that you run the risk of un-leveling the playing field.
But, look, we’ve got to be able to fix it because also, let me tell you, I have friends that work in hedge funds, and they were like, “Whoa.” They felt like this was very unfair. I said to them, “But wait a second, you guys go after – how do you think a CEO feels when you target their company?”
Ideally, right, hedge funds are serving a purpose. If they’re saying, “Gee, that CEO isn’t cutting it, and this company should be making way more money,” then that CEO – that company is going to be run more efficiently because there is that threat, right, of the shorts coming in.
Simultaneously, hedge funds themselves that are making these decisions to short companies ought to be awfully darn certain that they’re doing it for the right reasons because there’s a community of retail investors out there that could suddenly launch a sort of mandate to go after them. I would think that it actually helps everyone.
Jaime Rogozinski: Yeah, absolutely. Look, these hedge funds, they understand the risk. They’ve done this forever, and so they’ve always had to identify the possible ways that things can go wrong.
I think what’s different now is they never had on their radar the fact that you can have individuals, a lot of individuals with very little money, group together and take the other side of the trade. And they didn’t take into account the mechanics behind the options market, which played a massive role in leveraging that money even more so.
And so I think that these hedge funds have always understood that there is a risk in play, but I don’t think they ever realized that retail traders were, themselves, a risk, and I think that now they do.
As far as the CEOs of companies are concerned, I’d like to think that they’re always on their best foot and they’re always doing the best – what’s best in the interest of their shareholders to increase the shareholder value. That’s their mandate of any CEO.
And I think that they absolutely despise short sellers because that’s going directly against anything that they’re doing. I think that Elon Musk is a great example of a CEO that despises short sellers. I remember him being very vocal about it, and I think that he is very much enjoying this as well because he feels a little vindicated that his company, Tesla, was – I don’t know if we’d use the word “victim.”
But Tesla was heavily shorted and that price was really suppressed for a while before he ended up being victorious with that. The market, the fact is that you have even more participants, and everyone’s just trying to make the best out of things.
Trish Regan: I guess the issue with someone like Musk is, and by the way, I’m blown away by him as a visionary and what he has accomplished at Tesla. I just think it’s absolutely amazing, and I applaud him for it. And I get it. He had to deal with the shorts.
But it also tells you there was a time when that company was a heck of a bargain, right? Enough people believed in it that the idea ultimately was a success. You don’t want a situation, though, where you’re sort of squeezing out players that could actually be really tremendous, but because there’s these weird biases or inefficiencies in the market where they don’t get the same opportunity.
Coming away from all this, if you had to – would you say, “Well, who the heck wants to be public? Who wants to deal with this circus?”
Jaime Rogozinski: In theory, when you wanted to grow your company, you take it public to raise funds for it. I think that if you want to go public if you’re involved in the startup of a company, that’s a good way for being able to cash out, but it’s also a way to legitimize you. Once you’re publicly traded, you have to adhere to all sorts of accounting standards and transparency standards. I think it formalizes and legitimizes a lot of businesses.
At the end of the day, if you look at stocks, if you zoom out and you don’t look at what’s happening this week or this month, they’ve always gone up historically. Obviously, there’s companies that have gone bankrupt, etc., and you’ve had periods of time where you had the stocks go down.
But, as a whole, the stock market also serves a purpose not just for the companies, but for actual investors who are trying to primarily fight inflation. If you want to really boil it down to what the stock market’s good for, it’s good for that, and it’s done that very well for as long as it’s existed.
Trish Regan: Yeah, that’s a great way of putting it because, by the way, I’m very worried about inflation right now. People say, “Well, what should you do?”
And I’m like, “Well, for a while anyway, you want to be invested in equities because you are seeing this massive inflation trickle through to things indeed like the stock market.”
So would you say then – would you say that the onset of the retail trader, that could potentially collapse the system à la long-term capital, that event that was back in, what, ’98, which could have been like a Lehman Brothers event?
Fortunately, it wasn’t because you had a bunch of banks come together to sort of save things. If regulators don’t get ahead of this, do we run the risk that there could be so much leverage in the system that it’s just too much?
Jaime Rogozinski: I take that question in two parts. What happened in ’98, meaning the stock crash, a lot of times when I’m answering questions people bring up the dot-com boom, the 2008 and the 1987. We had a very big stock crash at the beginning of last year where the indices fell close to 50%, but nobody ever asks me about that because we just bounced right back out of it and ended up just fine.
And a lot of that was – after people have studied what happened behind the scenes, they have credited the retail traders as part of what helped that recovery happen a lot faster. I think that these retail traders say, “I know how this story ends. The stocks go down and then they end up going back up, and so might as well make that happen now instead of later.”
So that’s one important component to keep in mind, but the second part of your question, the leverage, I’m absolutely very worried about the leverage because when I got started in 2012 and started looking at these funny instruments that existed, meaning –
Trish Regan: Derivative products, yeah.
Jaime Rogozinski: Exotic leveraged ETFs that allow you to circumvent certain mechanics that are in place or policies in place. You can’t, for example, short – you can’t short sell from your 401(k) plan, but you can buy inverse or leveraged inverse ETFs, and you go long because you’re buying these shares in something where behind the scenes somebody else is shorting it for you.
Boom, you’re now shorting the market, and you can do it leveraged. And then you can buy stock options on top of these ETFs which are even more leveraged. Absolutely it’s a very big problem when you have this amount of leverage.
Last year WallStreetBets – at the end of 2019, WallStreetBets also made the news because a handful of people figured out that they could get what they called infinite leverage. They called it the “free money cheat code” where they realized that the broker they were using overlooked this collateralized requirement for selling covered calls.
They were not securing the money used to sell the covered calls, which allowed them to just recycle and buy more shares and keep selling covered calls. They ended up taking a $5,000 account, they deposited $5,000, and they turned it into $1 million worth of buying power.
Obviously that was an oversight, and that was eventually corrected. But for a short period of time you had a lot of very ambitious, risk-hungry individuals that were way overleveraged, and they could have potentially caused some serious systemic issues at that point, right?
Trish Regan: But where are the brokers in this? Because a lot of these brokers are publicly traded. And so aren’t they thinking through the ramifications of, “Do we have the proper collateral for the people that are trading?”
Jaime Rogozinski: They should, right? This was a mistake of the broker. This broker was Robinhood. They are not publicly traded yet. I think they’re going to be pretty soon. But they’re also new. They were very new to stock options at the time, and they have gone through growing pains.
But unlucky for them, you have these beta testers on the financial system that are not afraid of margin calls. They’re not afraid of risk. They’re not afraid of losing money, and they’re doing some really risky maneuvers in some cases that cost a lot of money to the brokers, and it was a costly learning experience.
But it’s hard to visualize all scenarios. You had, once again, during the pandemic, large brokers that are extremely reputable and very well – very experienced, like Interactive Brokers, that had a huge issue when oil prices went negative, right?
That’s nothing to do with leverage. That has something to do with we never anticipated oil prices being negative, so their computer sign – the computer programmers never put in the negative sign on the prices for these contracts. And so people were buying these contracts thinking that they were positive and they were negative, and it cost them a lot of money, too.
So it’s difficult to really think of all these scenarios and go patching them on, but having such an influx of people that are creative and, once again they’re not afraid, that they’re also exposed to these really sophisticated leveraged synthetics, whatever, with a lot of really fancy acronyms. They can potentially cause some problems.
So, yeah, I think the regulators need to, as best as they can, try and update their policies so that they can reduce that risk, that systemic risk, and at the same time not affect the function of the market.
Trish Regan: OK, I want to play for you some sound from yesterday’s hearing where the issue of these groups of traders, because some people are worried that people are acting together and they’re saying, “OK, this is our stock. This is our stock.” And they feel that in and of itself is a rigged game.
Here’s one of the consultants before the Senate today to testify on this. Let’s listen.
Rachel Robasciotti: When the GameStop-Robinhood episode occurred in January, I was immediately reminded of the MIT blackjack team of the 1990s when a group of students banded together to break the bank at several large casinos. They realized that if they worked together, they could win substantially more money than the average gambler.
So using their math skills and their technology, they coordinated to quickly and strategically place large bets against the house. It’s pretty easy to see the obvious similarities between the two situations. Like the MIT students, the Redditors in January were young, knowledgeable people with high appetites for risk who chose to collectively speculate by making quick bets against a larger player with a perceived advantage.
On the other hand, like the casino owners, the hedge funds are these large institutions with specialized knowledge about the game who some say routinely use their size to tip the odds in their favor. What is not obvious, whether in the casino or the stock market, is what the wealthy institutions and upstarts have in common. They are all fast-moving, high-risk speculators with more skills and tools than the average person.
Trish Regan: It’s interesting. It’s almost like that could have been you saying that. By the way, I want to point out again that your book, WallStreetBets: How Boomers Made the World’s Biggest Casino for Millennials, I feel like she was sort of quoting you in some ways, right?
You’re making that point, I think, that both sides here, whether it’s the Redditors or whether it’s the hedge funds or whatever, there are a lot of people that are willing to take on quite a bit of risk.
Jaime Rogozinski: Absolutely. Like I said, there’s always been a casino component. In fact, in other languages the word for “trader” is literally “speculator.” It is in Spanish, at least. And you have these conservative investors like Warren Buffett who have taken losses recently with the airlines and ended up cutting some losses there.
So everybody loses money. The idea is to make money. The idea is to try and define what the risk tolerance is, and risk and reward go hand in hand. You have now these traders, these active retail participants that have really high appetite for risk, and they have really high hopes that they’re going to get rewarded for that.
They’ve found ways to game the system, not necessarily super gaming it in terms of cheating. It’s using the rules that already exist, that are legal, that are allowed by the regulators, to try and tip the odds in their favor, much like these students that ended up learning how to count cards. They were very apt, and they were very skilled and knowledgeable.
It does take also a fair amount of skill and knowledge to be able to do what they did with GameStop. They would not have been able to pull that off with Apple, and there’s a lot of really technical reasons for that.
Trish Regan: Is it because it was more thinly traded?
Jaime Rogozinski: Yeah, the liquidity was low, the market cap was lower, and the stock option composition of it – sorry, the short float was insane. It was over 100%. The shares outstanding were relatively low, and the stock option profile was just primed for the perfect storm to come together.
Trish Regan: But short interest, by the way, that’s public information. People can see what stocks are being shorted.
Jaime Rogozinski: You need to know that a company that’s over 100% short float is more susceptible to a short squeeze, and then you need to know that stocks that have high volume with out-of-the-money puts and out-of-the-money calls with a huge amount of volume with those are also primed for – it’s no longer the short squeeze. Now we’re calling these things beta and delta squeezes and gamma squeezes that are once again more technical.
But you’re forcing – pretty much anyone that has their hand in GameStop has to buy the stock, period. Whether you’re the seller of the put options or the seller of the call options, both of those guys have to buy stock.
If you’re the short seller, you eventually have to cover your loss and buy stock, and of course, the guys that are betting that the stocks are going to go up are also having to buy stock. All of this is publicly available, but they just need to know that all those things work together in order to pull off what they did.
Trish Regan: OK, so then let me ask you this. Do you think that – is Keith Gill entirely responsible for this or is he just another one of the people that may have benefited? Do you think that there was – I would have to assume that there were some pretty smart people that kind of got this, right, initially. But then how does it take off?
Jaime Rogozinski: That is a phenomenon of the social media age, the age of viral videos and viral memes. Justin Bieber has become a huge celebrity. You have a TikTok video of a guy on a skateboard drinking cranberry juice. All of a sudden you’re selling out all the cranberry juices in the grocery store because everyone wants to try and copy that. That is a phenomenon that is probably going to be studied for a while.
You have the catalyst. You have Keith Gill who is the face of it because he had taken this trade in a very public fashion, and he’s also a really personable guy. He’s entertaining to watch, and he got a lot of attention.
So he kind of became the catalyst, but singlehandedly he needed the help of everybody else, including the media that was starting to cover this, because as soon as the news is putting attention on this, you have other people that are saying, “What’s the deal with this GameStop? I want in, too.”
Individuals that may not have known about this now know about it. So everyone is working kind of in unison and in a way that you cannot predict as to how and why it happened, much like you can’t predict how and why a video goes viral.
Trish Regan: Wow. True, although as somebody who has a presence on social media, I don’t know, sometimes you can kind of tell like, “This is going to be a little bit of a flamethrower thing, and people will respond to this,” versus this is a little bit more –
So I hear you, but I also suspect there was a little bit of sophistication that went into it initially or maybe sort of unknowingly. Keith Gill and others unknowing were able to provoke this in ways that, just, it took on a life of its own.
I guess people say, “Well, what’s the next GameStop,” right? And they were watching AMC, and everybody’s watching bitcoin right now. I guess that’s kind of impossible to know, right? Because, well, what is going to really just take off?
You can’t anticipate that the guy on the skateboard – you might to some extent, right? Some of it I do think can be manufactured, especially if someone’s telling the kid on the skateboard, and I didn’t see that particular TikTok video, but saying, “Hey, well, do this or do this, and maybe we can sort of push it out there.”
I don’t know, some of it’s got to be premeditated. I would think that some people are just smart in this space. And then a lot of it’s just kind of like you throw stuff at the wall and see what sticks.
Jaime Rogozinski: I don’t think Keith Gill thought he was going to pull it off. I don’t think his intention was ever, “I’m going to start a movement,” and to lead the biggest short squeeze ever, well, I don’t know about ever, but in recent times and, “I’m going to create this huge national dialog.”
I think his intention was, “I believe in my idea, and I believe in my bet.” He put a fair amount of money, right? $50,000 is not insignificant. And then it slowly turned into these things where, yeah, I think he probably had his hope: “Maybe this is primed for a short squeeze. Maybe some big funds will see this and they’ll help me out.” I don’t think his intention was, “I’m going to rally up the troops and make this happen.”
But you have to have those components. He had to have had a stock that was susceptible to this and that level of knowledge. And so you have to start off with all the ingredients necessary for creating this kind of viral moment.
So while it’s impossible to predict what’s going to be the next GameStop or the next viral video or whatever it might be, you have to have certain elements in place, and you can kind of hope for it.
This is why you saw AMC and, what was it, BlackBerry and a couple of other ones that had a similar profile that said, “OK, this stock also has the same characteristics. Let’s go with this one, right?” But it didn’t quite go as viral. People are still on GameStop. Last I checked, GameStop was at like $250 today.
Trish Regan: So you’ll laugh. I was telling people to buy it. I don’t know, this was – I don’t usually single out stocks, but I was talking about the market, and I was saying – I can’t remember. At one point it looked interesting because I thought, “There’s no reason why this company can’t transition into an online platform.”
But then at some point I guess the Redditors got involved. It was like, “Whoa, OK, it’s completely out of whack.” That was quite some time ago, within the last year, though, that I said, “You know, this looks interesting.”
But all that said, OK, you and I were talking earlier, and you said some people ask you, “Hey, what’s the next GameStop?”
And you’re like, “You can’t predict it.” Do you stand by that, or do you think that Keith Gill is going to have this huge following and he can be the Warren Buffett of the millennials, he just targets this one and everybody follows along, or does it not work that way?
Jaime Rogozinski: I think that he carries a certain amount of influence, but it’s difficult. So you have another trader that was really high-profile and became really high-profile during the pandemic. His name is Dave Portnoy, who owns a big sports betting company, and while there were no sports as everybody was in quarantine, he was looking for something else to do with his time.
So he got into the stock market, and he got a lot of attention because he’s got a huge following. He’s got millions of followers on social media, and he has a huge audience that was also bored and looking for things to do.
He arguably would be a good example to try and test this theory, and to some extent maybe he did and didn’t because he started trading, and he would announce which companies he was buying.
Trish Regan: Yeah, but he doesn’t have a background in this, right? I think there’s some distinction between him and Keith Gill because Keith actually had some sort of background in finance, and Dave, I guess he has a background in betting, but not necessarily finance. But it’s a good point, right, and it hasn’t really worked for him.
Jaime Rogozinski: I don’t think it’s anyone’s ever intention to make it work for them. His motivation I think was to make money and find something else to do with his time and maybe start a new little segment to his business.
I don’t know if his – I don’t think anybody right now wants to become the next short-squeeze micro-firm because you also kind of get into some – you have to question sometimes the legality. You have to walk a very thin line.
So far everything that happened with GameStop was perfectly legal, but that’s because people were really careful with their choice of words, etc.
The moment you use certain words or you’re a little bit – you’re not careful with the way you’re presenting the information or disclosing it, you can get yourself in trouble with that, and so it’s not an enviable position to be in, especially one that can get you in trouble inadvertently just because you don’t understand all the laws and regulations.
And so I think that most people at this point are more interested in just making money and becoming participants instead of being in the spotlight.
Trish Regan: Well, he did start an ETF, which is interesting, and it got a tremendous amount of inflows, I think $280 million, just on its first day. So maybe that’ll be his future. So much for sports, although sports are coming back online. That’s still becoming a thing.
All right, well, so what are you doing on WallStreetBets now? Do you ever go on and moderate anything?
Jaime Rogozinski: I’m no longer a moderator on WallStreetBets. I go on and read what’s going on occasionally. I also read other social media platforms and read all the news, and I’m very in tune with what’s going on with the market. It’s something that is a passion of mine, and I continue to be really fascinated by it.
I just continue looking at different opportunities. I was interested last year before the pandemic started in creating kind of a live day trading event, a competition that’s tournament style, and I’m exploring ways of bringing that back in ways that are more coronavirus-proof.
Trish Regan: Jaime, I think that would be just so absolutely cool because I’ve often said that even – when I worked at CNBC, sometimes we’d have these teams of kids. It would be a competition, and you would have them trade stocks to see who – you could really create a very interesting day trading type event, if you would. I think that would be super cool.
I wish you all the luck. I look forward to talking to you again. This has been so insightful and so interesting. Thank you so much for taking the time. People should check out your book, WallStreetBets, for sure, and they can get more information there.
Jaime Rogozinski: Great. Well, thank you very much for having me. I had a good time, and always a pleasure.
Trish Regan: Thanks so much for listening, everyone. Just a reminder, you can find me on americanconsequences.com. All of my long-form writing is right there. You can find me every single week doing really interesting interviews right here on American Consequences on the podcast and of course every day on trishintel.com.
I look forward to seeing you again next week. We’ve got a big, big guest. None other than Steve Forbes is joining me. I’ll see you next week.
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