Wall Street Bets: A Crowdsourced Stratton Oakmont
“Stratton Oakmont, Inc. was a Long Island, New York, “over-the-counter” brokerage house founded in 1989 by Jordan Belfort and Danny Porush. It defrauded many shareholders leading to the arrest and incarceration of several executives, and the closing of the firm in 1996.”
Deep down we crave speculation. The thrill of betting everything on red, the adrenaline of knowing you’ll either walk home a rich man or a penniless fool, that feeling will never be replaced with a pragmatic investing approach. Dollar-cost-averaging into low-cost ETFs is a boring, tedious, but smart way to save for retirement. The problem is, 10x-ing your weekly call options just hit differently.
Usually, we can resist this “all-in-on-one-trade” mentality. But sometimes, our collective animal spirits take hold and don’t look back. We are at one of those moments for Wall Street Bets and its 890,000 speculators.
This resurgence in highly speculative trading has likely been boosted by every online brokerage going commission-free when trading stocks. Volume from retail investors is now soaring, likely influencing certain parts of the market more than usual. It’s free money folks, get with the program*.
And the beautiful thing about this mini-mania (that’s a good thing to call it, right?) is the thoughts, execution, and debate are all being displayed publicly in one Reddit community.
You might be wondering now, what exactly is Wall Street Bets? Or, maybe, what is the point of Wall Street Bets? I’m going to try and answer that and more in the next few sections.
What Wall Street Bets Says it Is
The simple description of Wall Street Bets (WSB, from now on) is “Like 4Chan Found a Bloomberg Terminal.” Okay, you have my attention. Now, if you don’t know what 4Chan is, that’s good. Don’t look it up either. Just know that this is not a politically correct site and that a good amount of these anonymous users are comfortable posting absurdly derogatory terms.
Warnings aside, the day-to-day activity on WSB is people making crazy bets, posting screenshots, and then rejoicing when they 10x their money or more likely getting angry when they post 90% losses. It’s quite entertaining. Here is an example post:
Please take time and pray with me for this guy’s portfolio.
Don’t think this is some outlier either. Scroll through the WSB feed and you will find the craziest of ideas every day.
But the most insane part of WSB is the groupthink-leveled options/buying strategies that have moved individual stocks over 100%. Just look at Virgin Galactic’s chart. Or Tesla’s. Remember, there are 890,000 members of this community, so big moves can be made if they all focus on one ticker.
And the way they go about it (well, did go about it, until the MSM picked it up) is actually kind of genius. Okay, maybe not genius, but not idiotic. Here is how I think it works. A bunch of WSB users buy a ton of call options on a stock like Virgin Galactic. This causes the seller of the option to buy shares of VG, driving up the price and the value of the call options. Keep getting people to buy calls and the cycle can continue indefinitely. It’s basically a crowdsourced Ponzi scheme. Just make sure you’re not the bagholder when the inevitable 30% drop occurs.
This is different than the old Robinhood “infinite leverage” trick where users would continuously sell calls (which brings in cash) and then buy the stock/options and eventually end up levered 500 times. This has since been fixed and was considered a glitch according to the company.
What’s crazy about this new WSB strategy is that flooding the market with call options is (probably?) not illegal, at least not at the moment. So it actually looks like they found a “cheat code,” albeit one that requires risking a ton of capital to do so.
What Wall Street Bets Actually Is
This is a take I have about 70% confidence in, is backed up by no underlying facts, but still believe in.
There have to be disingenuous users on WSB. There’s no way 900,000 humans are all acting in the best interest of everyone else. People get greedy, especially when dealing with gambling on stocks, and eventually, things get out of hand (like they did last week).
The only question is, how do people manipulate these threads? Do they communicate with other power users, agree to all hype-up one security, and then get everyone to buy it? This would be a classic pump-and-dump scheme, getting other people to buy something and then pulling the rug out from under them.
Or are users pumping up a stock, knowing it will eventually come back to earth, and then buying put options to profit from the downside? Either way, some form of manipulation is likely happening, and, unless any of these users are engaging in fraud, it is entirely legal.
This is why WSB is like a crowdsourced Stratton Oakmont. The power users are Jordan Belfort and company, pumping Virgin Galactic shares and getting everyone to buy-in. The only difference is, WSB is an entirely digital and anonymous community that has grown organically with this bull market.
This is nothing against the creators/moderators of WSB. The only thing they can control is hate speech and trolls. What can they do if an anonymous user convinces 10,000 people to pile into a penny stock if they can’t prove any wrongdoing? These are just the consequences of an organically growing community in a speculative market.
What Wall Street Bets Might Be
This is a take I don’t really believe but would be absolutely fascinating if true.
What if, in order to gain users and brand awareness for their platform, the Robinhood cofounders were secretly power users on WSB?
This would be a perfect scheme. Robinhood makes all of its money on trading volume, selling order flow to high-frequency traders. Getting people to trade like maniacs (as they do on WSB) would greatly increase volume and thus revenue. It doesn’t matter if investors are making or losing money. If they are trading, it brings in money for Robinhood.
Again, this is definitely not true, and I don’t believe the founders are actually using WSB. But man, would that be one hell of a story.
If you haven’t been on WSB before, it is worth your while to check it out. They are truly crazy over there. But to send you out, here are some of the most hilarious posts I found when researching for this post:
Disclosure: The author is not a financial advisor, and may have an interest in the companies discussed.
*That was sarcasm.