Odd Lots - How A Profane Subreddit Moved The Market

Episode Date: March 5, 2020

In recent weeks, before the stock market plunged, a page on reddit called r/WallStreetBets suddenly started exhibiting enormous influence on a handful of stocks. The emergence of online chat rooms making huge wagers in the market calls to mind the message boards of the dotcom era. But this page is taking it to a new level. On this week's episode, we're joined by Bloomberg News reporter Luke Kawa, who has been covering the page, as well as the page's founder, Jaime Rogozinski, who started it up in 2012.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio. That's vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation distributor.

Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. Tracy, it really feels like from a market's perspective, this is the closest we've been lately to sort of 2008 financial crisis vibes. Well, since the financial crisis, wouldn't you say? I would say so. and I would certainly say the statistics back you up. Biggest weekly sell-off since the financial crisis we've just seen, right?

Right. Massive sell-off in risk assets, an extraordinary amount of repricing of expectations for central banks all around the world to come in and intervene. And we've had other periods of sort of semi-crisis since the great financial crisis during periods, to say the Eurozone, but it's just never felt as extremely uncertain as it does right now. I don't know. I sort of remember late 2015. Yeah. I mean, late 2015, you had all the issues going on with credit and you had one big fund blow up. So I'm still waiting. I'm still waiting for the second order effects of the market sell-off that we've seen to emerge. That's true. Like, we haven't

actually seen any sort of major liquidations or institutions of various size, like truly go bust yet amid the volatility. Obviously, nobody, you know, we're not hoping that that happens. For now, it's mostly been like a sort of a market's reaction. But as you say, there hasn't really been a second order effect just yet. Yep. Very true. So obviously the coronavirus is, you know, The clear contributing factor, it's people are gripped by panic all around the world. It started in China late last year. And now it seems to be spreading to countries basically everywhere. But I also think that there is another contributor to the top. It's not just the virus that caused the top. Well, I mean, the virus didn't cause the top. The virus was the catalyst for the top to no longer be the top.

and for markets to sell off. But what are you thinking about, Joe? Well, I mean, obviously it's our recent Businessweek cover story that our colleague Luke Cowell wrote about when the bull market got weird and about all these traders and online forums making crazy big bets. And I think in retrospect, many people will see the recent cover as what really did the bull market in. Yeah, it was good timing.

But in the history of market crashes, people always go back and sort of look for retail investors who start to become really overconfident. Some people actually look at retail investor participation in the market as evidence of the top coming. And so some of the behavior that we have seen embodied in places like what Luke was talking about, you could maybe see that as an indication that markets were a little frothy. Yeah, so for those who actually haven't been paying attention to this particular subplot, which is probably most people because there's bigger things going on in the world, over the last several weeks, prior to this extreme bout of selling and volatility that we saw, there was a lot of attention paid to the behavior of people on a certain internet web page or chat room or message board, whatever you want to call it. Subreddit. Which there was an extreme subreddit. It was on Reddit. An extreme level of speculative activity, particularly in the options market, the likes of which we haven't really seen, arguably, since the glory days of the Yahoo message boards back during the dot-com bubble.

And it's a really fascinating story. It's a really interesting look at how the markets work and how retail players can really make a dent in publicly listed equities. Yeah, so this is the thing that I find the most fascinating about this subreddit. It's called Wall Street Betts. And in recent months or over the past year or so, a lot of the people on it don't just think that they found good ways to make money through investing in the market. They think that they found a good way to sort of force the market into or force the market to do what they want it to do.

So they actually think that they're impacting how Wall Street functions. and pushing up the stock price. And that's where it gets really, really interesting. Are they, in fact, having this impact on the market? Right. And I remember the message boards, the Raging Bull message boards, Silicon Investor, Yahoo message boards from 1999 and 2000. And I think they were far less ambitious than what people are doing these days.

So for more on this, let's start by bringing in Bloomberg's. own Luke Cowell, who did have the cover story that cursed the market overall. Luke, thanks for joining us. So, first of all, just basically describe what it was that was worth covering here about this subreddit. Well, I think for so long, we've been waiting for the return of the retail investor. And, you know, it's been this kind of long-awaited thing that's never really happened throughout any time during this bull market.

And this is kind of like the, be careful what you wish for. story because what became quite interesting is how you were seeing retail enthusiasm get expressed in the markets. And so I remember there was one day. It was January 8th. And this is when Tesla was still below 500, if you can imagine, a day in which that existed. But it was a Wednesday and you saw a lot of bidding for the Tesla 700 strike call options that would expire at the end of that week.

Tesla had already been up like 25, 30 percent that week, as was its want early. earlier this year. But it just seemed like this is this is such a ridiculous bet. Why would anyone do this? This doesn't make sense as a hedge. There's got to be a better way to express a hedge if you're, you know, if you're short the stock or if you sold calls, like what's going on here? And someone said, you know, this is just a Yolo bet. And the second I heard, you know, Yolo bet, I went to Wall Street bets and tried to see what, what they were indeed up to. You only live once. Why not make a huge wager? Exactly. And, you know, when I went there, I saw, you know, lot of people just that were seemingly enjoying a lot of success on Tesla.

And then that spiral to kind of other story stocks where they, you know, thought the, it would do nothing but go up and up and up. And, you know, Virgin Galactic is the, you know, the next example, plug power, another one that had its kind of time in the headlights. And then Lumber Liquidators is one I find very interesting because it's not like, it's not that fun of stock. Like Lumber liquidators compared to Virgin Galactic compared to plug power. Like it's really hard to wrap an enthusiast.

you know, big story around it. And yet, you know, a lot of the ones of the three ones I've last listed, they have in common, it's relatively low float, relatively high amount of short interest. So when you got a group of people together that thought, you know, if we're all interested in the same thing and if we are all kind of, you know, combining buying power, where can it have an impact? Well, in names like this, it can. And you were seeing at least the volumes go up like crazy. And it became two.

much to call it coincident, coincident timing or coincidence after a certain amount of time. So, Luke, two things here. Can you walk us through exactly what the options trading strategy was here? Because, you know, Joe and I kind of alluded to this in the intro, but it wasn't just that they could push the stock up. It was that they could actually exploit a loophole in the way certain financial contracts or Wall Street actually works in order to make the stock go up. And then secondly, would you say that Wall Street bets is representative of the average retail investor? So on the first part, and this relates to you, I'm not sure if people actually believe this, or this just becomes a, you know, very happy supporting evidence and something that makes you feel a lot

better about making your moonshot bet, the, you know, the fact that someone might be there to help accentuate it and help bail you out. So the thinking here is that when you, like, say you're buying a call option. On the other side of that, if it's a fresh option, there's going to be a dealer. And dealers are not in the business of taking directional exposure. So when they're selling that call, what are they doing? They're also, you know, buying a certain amount of stock to hedge their exposure. That's called delta hedging. And as if the stock does continue to go up from there, it, you know, resetting your delta hedge,

which would be kind of gamma hedging, but it's really just reselling. setting your delta hedge would entail that as the stock goes up, you would be required to kind of buy more and more to make sure that your directional exposure to the stock hasn't changed. So when we described this dynamic when we were talking about the Tesla calls, the Tesla C-1,000 strike calls in, I believe, late January, someone on Reddit latched on to this and said, you know, L.L. Bloomberg is admitting that the stock can only go up if we continue to buy calls because of the hedging algorithms, which is, you know, it's very much an overstatement of what can actually happen.

Can I just step in real quickly because you mentioned delta hedging and gamma hedging and all this stuff, just for people who need a little bit of time to catch up, walk us through very simply. The idea is people buy a lot of call options. The dealer who sells the call options are then on the hook if the call options essentially become in the money, right? And so in order to avoid that risk of having to pay out a big wager, just like a casino, they have to sort of balance their own books. And that requires them to purchase the underlying stock. Yeah, dealers are trying to make money from the bid ask spread

and making you pay both sides of it during your transaction. They're not in the business of really making sure that or hoping that Tesla goes down. They'd like to be, you know, cover their butts in all contingencies in all cases. So that's what's kind of going on there. And it's just, you know, with some Greek letters surrounding it. But that's the basic kind of scenario and mechanism you described perfectly. So trying to exploit the fact that dealers or big banks on Wall Street need to maintain a neutral position when they're writing all these contracts doesn't strike me as something that your average retail mom and pop investor is really doing. So is Wall Street bets a little bit different? I'd say they're a lot more aggressive about certain tactics being used and the kind of the hurting behavior.

I don't think the average retail trader is really trying to think of, okay, like if I get together with Jim down the street and, you know, Mary across the road, who I play bridge with, if we really get together and start, you know, stockpiling our potential buying power that we can kind of, you know, maybe lift some bids here, maybe get some dealers offside, maybe cause some. kind of a gamma chase. So yeah, it does seem from that, from that point of view, a lot more sophisticated and ambitious than, you know, some people, others speculating options might be. On the other hand, just because it sounds more sophisticated doesn't mean it's a better strategy, doesn't make what's being said more true, because if we've learned anything about kind of the recent market dynamics, presuming you are the only actor in the market and able to move it is kind of, it's a fool's errand. And that's why, you know, if some, if there's, power out there to buy all these options. You have to recognize it on the other side of it.

There's going to be potentially a desire to sell. And we've seen a lot of selling pressure come into the market. That's completely overwhelmed whatever retail buying. Right. The market's probably, I mean, the market's got an absolutely clobbered just since your article came out. And presumably, if you had been buying a bunch of call options ahead of that, one is not doing particularly well this week with that strategy. Yeah. Like we saw a bunch of 10,000 percent. Up days for a lot of these moonshot options, but most out of the money and very low delta options are going to expire worthless. It's just the kind of the name of the game.

Okay, so on that note, in addition to having Luke join us for our episode today, we have another guest. Luke has set the stage, but we actually have the founder of the subreddit Wall Street Betts joining us now, Jamie Rogazinsky. He founded the page, got it launched in 2012. Jamie, thank you very much for joining us. Thank you for having me. Okay, so I want to obviously get to everything that Luke talked about and this sort of crazy phenomenon in force in the market that Wall Street Betts has become. But you started it in 2012. What was the purpose? What, when you're like, I'm going to start a new page on Reddit called Wall Street Betts. What were you thinking? Well, I mean, back when I started it, I was looking for a forum where we can discuss

high-risk trades more akin to day trading or high-risk or active investing. All the forums that I found on my both on Reddit and off-reddit were more traditional, diversified, long-term, long-time horizon type investing. And so since I couldn't find it, decided to found Wall Street bets and has evolved a bit from what I originally intended, but that was the original idea behind it. it. Can you describe the Wall Street Betts demographic? Like, who is your average user on Wall Street bets? And why are they on that subreddit versus something like the investing subreddit? So the, I don't actually have access to the specific demographics, but I'm going to take a very

educated guess and say it's going to be mostly males, young, probably 18 to 35. I mean, obviously they're old enough to open a birthday. brokerage account and have enough of an income so that they can make the type of bets that they're trying to make, and why are they hanging out on Wall Street bets? Well, I mean, for, I have various reasons or various ideas as to why they might want to be doing it, but for probably similar motivations that got me in the first place, right? I was single at the time, had a disposable income, had a reason to be a little bit more aggressive when people are older and they have a family and they have to be a little bit more cautious.

Well, that's when they want to start taking more of a precocious approach to investing, but when they're younger, they can afford to take the risks. And so, you know, Wall Street bets is a place where what welcomes that type of behavior and it welcomes a type of, you know, on some capacity, it's aggressive investing, active investing, and, you know, oftentimes it's straight up gambling. So I'd say it's people that are just in that demographic that are looking to make some quick money. Yeah, we haven't really talked about this aspect. But in addition to the demographic, and you mentioned people who are willing to take more risk,

there's a certain like Wall Street bet's mindset. And I've been reading the page off and on for several years. And it's not only that it seems like there is a high degree of sort of like risk-taking or thrill-seeking. There seems to be also like a certain amount of nihilism associated with it in which people seem just as excited to massacism too. People seem just as excited about posting screenshots of them losing $100,000 or losing a fortune in a single day as they are as excited about making a bunch of money. There's a lot of egging people on to take more and more risks. Talk to us about that mindset, just the sort of the thrill-seeking masochistic nifascistic nifference. nihilistic aspect that we see on Wall Street bets and why you think that's that emerges.

I'm not sure necessarily that I've seen people egging people on. Okay. To take on more risk, I think that the pure pressure certainly exists. You know, I see where you're coming out, but I've yet to see somebody to say, oh, I think you should increase your position. Fair enough. I think it's more of a pure pressure type scenario that people try to get attention. People want to impress each other, right?

Is that kind of what you're saying? They just want to, like, be cool and impress each other. or who took the wildest risk? Yeah, it would probably be more of motivation like that. But, you know, as far as the magic, I think it's more, it's a very honest forum, right? If you go outside of Wall Street bets or, you know, you go on Twitter or Finn Twitter, or any of the other areas, you have a lot of people that have just these huge egos that show these really impressive trading track records.

And I'll look at my fancy car that I'm driving. And, you know, check up this impressive statistics for my... you know, trading history and whatnot. And so you have these glorified people that it's almost impossible to become them, whereas in the law street bets are just very honest with each other. And they say, no, no, hold on. It's very difficult to actually recreate what they're talking about. And in some cases, statistically, very improbable.

Some people obviously can do it, but most people cannot. I mean, the statistics also back that out. People that want to actively day trade, most of them fail. So I think that it's more of an honest approach to it where they say, okay, I know that I'm likely going to lose money into it. So let's just be honest about this. Let's not try and pretend that I'm something that I'm not. And I think what's celebrate it is more the honesty behind that more so than,

hey, check it out, guys. I lost a lot of money. Go ahead and give me some upvotes in karma. It's, hey, guys, look, I try this. I put my money on the line. I said this was going to happen, and I failed. And so people celebrate that follow-up honesty. And they say, wow, this is a genuine conversation that we're having.

So I think that's more the motivation that you see. And it comes off more as the celebratory lie. I mean, I'd agree totally in my time during it because thinking about all of these stocks that were going up, there were people on Wall Street that's going, no, no, I'm selling Tesla calls. I'm doing this. I'm doing that. And then you'd see them come back, you know, a week, two weeks later and go, okay, so, yep, all those positions I was talking about earlier, I'm getting completely, completely hoax.

If you want to know how much I'm going to get host in the future, here's the other strikes I'm short, out of the money, have fun ruining my life type of thing. But it's very much an unpretentious, honest conversation. And it is refreshing for those who have spent, you know, their lifetimes or most of their waking hours on finance Twitter. But, you know, on the other side of things, the degree of, you know, kind of willingness to go in with no information on the other. hand, the, I think the best example would be, you know, one person posting, you know, I don't know what, I don't know what options are and I don't know what LL is, but I'm up 10,000 this morning and thank you. This is my lunch break coming on to post it. Thank you very much. And then, you know, one person going,

you know, what, what the hell can you expect? It's lumber liquidators. They liquidate lumber. It's right there in the name. And, yeah, so it's, it's fun. It's entertaining. And it's definitely, it's definitely a different scene from what I've been used to on the internet. Right. One can never admit on finance Twitter that they made a mistake, but on Wall Street Betts, it's almost a badge of honor if you have this big loss. Jamie, you actually wrote a book about Wall Street Betts, and this is going to sound really condescending, but I thought it was surprisingly thoughtful and kind of earnest, which wasn't what I was expecting because the subreddit itself tends to be this sarcastic, jokey, macho place. But there was this one chart in your book.

and it shows Robin Hood account openings alongside the growth of users on the Wall Street Betts subreddit. Can you talk to us about the importance of this new crop of online brokers or the dynamics in the brokerage industry currently in fueling Wall Street bets? Yeah, I mean, to be honest with you, when I came up with that chart, I was not expecting that. I was very surprised and even more so surprised when I broke down that chart a little bit further. So I'll first describe that chart. What I did is I superimposed the growth of Wall Street bets since the inception of Robin Hood, you know, the growth in terms of subscribers, and then the growth of users of Robin Hood. And those lines were pretty much right on top of each other.

And, you know, the growth was right on part of the correlation was very easy to see. And what was even more surprising was, I think it was around 2018. if I'm not mistaken, Robin Hood introduced stock options as part of their offering, the product offering to their users, and they saw a very steep change in their growth, having a dramatic increase in users, and Wall Street bets had the exact same slope change, right? So the adoption rate increased, and so, you know, it does ask the questions, okay, what, is there a correlation here? And obviously, I mean, it's hard to repeat those because both of those numbers are big enough

that they're statistically significant. I think the proliferation of not just Robin Hood, but just all these low commission, now zero commission, brokerages are making, lowering the barriers to entry for pretty much anyone. And all the, even traditional brokers,

I mean, I'm talking Ameritrade and Charles Schwab and, you know, even Vanguard is now offering stock options. Vanguard being the holy grail of, you know, safe ETS for index fund.

Right. uh, the type investing, right? So the fact that you have all these brokers making it really, really cheap, lowering the barriers to entry, have a lot of, let's call them younger people or people that have, they want to enter this market with less money or, or want to even experiment. Maybe they have the money and maybe they just want to play with less. Now they're able to do so. Anyone that wants to play with it just by definition would want to find a way to experiment. And I think that experimenting with a place that has more aggressive or more, um, diverse type of conversations of different types of security is more so than just the stock.

We don't talk about cryptocurrencies very much on the Wall Street. But obviously that's also part. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard.

At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio. That's vanguard.com slash audio.

All investing is subject to risk vanguard marketing corporation distributor. Glad you mentioned cryptocurrencies because when you talked about the honesty of Wall Street bets, it reminded me of an important point I saw someone make, which is that there are a lot of similarities between this sort of like casino options betting that you're seeing now on Wall Street bets and the crypto craze, especially of late 2017. But the difference is to me, one, is that you guys seem fundamentally more honest because I remember 2017, and all the people going crazy for crypto, we're also trying to pretend that they, like, understood something about the technology or like, oh, we're, like, building some really important decentralized system here,

or we're going to, like, run all these. This is going to be a really important smart contract platform upon which all these apps can be built and stuff. Like, all their gambling was couched in the language of technological innovation, whereas it seems like your gambling is couched in the language of gambling. fundamentally just way more truthful and honest than crypto of 2017.

It's right there in the name with Wall Street bets. But I wanted to ask you a little bit more about the sort of mentality because I think the tagline on the page is like if the Bloomberg terminal met for chain message boards or something like that. And there is, you know, it's extremely crude. It's extremely politically incorrect to say the least. there's a lot of people who like refer to each other using homophobic slurs and other things that we have to edit out whenever we do an article or talk about a comment on the page. So I'm just like sort of curious like could you explore or explain that aspect of it more this sort of like, I don't know if it's a deep irony or profanity. I mean, it's right there in the description with the fortune aspect of it and from whence that aspect of it emerged. Why is Wall Street Betts so offensive?

Yes, that's a good way to put it. All right. So the tagline itself, I came across it when I was reading a different forum. It was the finance forum many, many years ago. And when people were trying to find a way to describe Wall Street Betts, it was very difficult. And somebody just said, hey, Wall Street Betts is like a Fortune or to find a Bloomberg terminal. So I like, Evan, I do really like it. There is a petition underway to potentially change the tagline to,

how can we have insider knowledge when we don't have any knowledge? And I fully endorse that one. Anyway, go on. Yeah, funny. You have that tagline. I put it up there and it's still true to this day, so we get that one. And, you know, with regards to the overall culture of it, the crudeness of it, the language, look, anyone that's been following Wall Street beds for a long time has realized that the,

I guess it's the locker room mentality, the insults, the slurs, they are, they come and go and bad. I guess it's just a way that to add on to the fact that this place has, you know, no filter, no, yeah, there's no reason to contain the way that you're expressing yourself, the way that you're trading or the way that these people are trading. And, you know, I can't really explain how or why it is that the case. came out that way. But what I do know is, you know, the way that these guys come off, it's very seldom offensive. So, for example, recently, you know, they've been referring to anyone that's

been bearish in a homophobic manner. And now that we've had a pretty rough week last week, a lot of these guys are in a form of endearing saying, hey, guys, you know, now I'm part of that category. And they're saying in an endearing fashion, not in a derogatory sense. Obviously, it's insulting. Obviously, it is, you know, offensive. And, uh, and, and I realize that. But I think that having watched these terms come and go give it a year and now it's instead of, you know, referring to homophobic, it's going to be maybe, you know, tall people or people that drive certain types of cars or people with certain color eyes. You know, they're equal opportunity insulters. And I've seen these, these trends come and go, uh, so often that I've no longer taken

and taking it too seriously. At one point, obviously, I was like, well, this is really distasteful. I can't, you know, I can't be associated with this. But having seen the way that it's not used in a hateful fashion, it's not used in a way that it's mean-spirited. It's obviously offensive. I acknowledge that. But it's, you know, it's, I guess, a phenomenon that I can't really explain. So we've talked a little bit about the mentality behind Wall Street bets.

And we've talked a little bit about the language used. on Wall Street bets. And Luke knows very well that it has its own terminology at this point. But Jamie, maybe you could talk a little bit about why certain investments seem to be favored or why certain bets seem to be favored over others. Like why options versus futures, why the emphasis on stocks instead of, say, currency trading, which used to be where we used to get these big leveraged bets, or we still get a lot of leveraged bets. Or we still get a lot of leveraged bets, but it seems like an obvious choice for Wall Street bets, and instead they've focused on some very particular types of investments. Why is that?

That's an excellent question. That's one that I actually explored in the book. The, I guess I'd break it down into two separate components, right? So why going for leverage versus not leverage? And that's, I think, self-explanatory. If you're going to go out and make a bet, you want it to be leveraged. If you want to buy a lottery ticket, you want to be able to the multiplier money by a huge percentage. So buying, you know, it's almost impossible to do that with stocks. And so leverage is the way to go. So looking at the scope or, you know, the tools that are available in the leverage the universe,

I've asked myself the same question. Why future specifically a tool that I personally favor? Why wouldn't they want to use that as opposed to stock options? And my thesis, I can't back it up. My thesis is straight up, it's more available, right? If you want to get approved for stock options on your Robin Hood account, you can do it instantly. Or not just, I don't know, I can pick on Robin Hood, just all of the stockbrokers, you go in there and you answer a quick little survey.

And for a lot of these guys, the answer is obvious what they want you to answer. And in many cases, even if they answer honesty, you know, I do have a lot of dependents. I don't have a lot of income, but, you know, I think that they want me to say that I don't want to lose my money. They'll get approved right away for stock options, and they can instantly start treating them. And so I'm going to say that it's because it's the most widely available. My guess would be that if futures or if, you know, Forex or to become just as easily available, it would probably also start getting more popular. When you look at the combination of, you know, new retail online focus brokerage, that combined with, you know, also high nominal prices on a lot of stocks, your Amazon and your Tesla increasingly, and then the potential for nonlinear payoffs.

So, like, that's just the recipe for options in general. And you've seen it really be taken up by the market. First six weeks of 2020, you had single stock options. up 77% of the notional volume off of record levels already at the end of 2019. So this is the Wall Street Betts fueled search. So I want to talk about the evolution a little bit of the page because when I first came across Wall Street Betts, maybe it was, I don't know, 2015, I forget when I started really looking at it.

Early on, like it always had the sort of like, you know, crude, offensive gambling nature, but, you know, a lot of memes. I remember in the early days when I was paying attention, there were a lot of memes about, say, the CEO of AMD, Lisa Sue, because that stock was doing really well, and she was making everyone a lot of money. And so there was a lot of, like, sort of glowing memes about her and all the money they were making.

And stuff like that, it was sort of, you know, just normal sort of message board chatter and so forth. When did this new phenomenon emerge, where it became less about sort of, just posting stuff and ideas versus what the emergent coordination, where we started seeing it earlier this year, maybe last year, where the idea is like, oh, we can all be a team, we can all jam the call option purchases and at the same time, it became less about just trading ideas versus let's see if we can move the market.

Well, I'm not sure that I still seen that, to be honest with you. You know, like, you've had a lot of this group-thing mentality going back from, for a long time, just like you just mentioned with AMD, you know, that was what they referred to as a mean stock, or even there was an article on Market Watch many years ago when they covered Wall Street Pets. They were talking about the stock at the time, or it was an E-T-F, UW-T-I, which was a crude oil EPS. You know, they mentioned a lot in that article. A couple months ago, somebody brought that article on Wall Street Pets, and when people read it, They said, what in the world is, what UWTI, I've never even heard of this thing before.

And how come this Market Watch article is pumping that stock so much? You know, it seems like that's all the things that we care. Obviously, the crowd that was reading this article didn't remember or wasn't a part of it. I think there's always been a kind of a group mentality. So I wouldn't go so far as connecting it as trying to come up with a coordinated buying attempt. And I think that what we saw this year, or, you know, what Lucas wrote about or has been writing about, you know, is definitely interesting. But I've yet to see a group effort where they say, okay, guys, let's try to manipulate the market. So this phenomenon was first spotted by him using Tesla, I believe.

And obviously, Tesla had already been somewhat of a meme or a meme stock or a focused stock of a subreddit. And so, you know, that one, I think inherently was already being the focus of the subreddit. And maybe it was receiving a lot of attention, a lot of additional volume on the stock options just because I'd be curious to see if he did a similar study like that, dating back all the way, you know, 2015 when AMB was popular, if you find something similar. So, you know, the point of this is I'm not really sure that some new campaign came out there where he says, all right, guys, this is the new name of the game. let's try and, you know, pump stocks. This one guy that came out shortly after this article, obviously the article, you know, put it in their heads that they can now, you know, found a new cheat code, the way they like they referred to it as.

So that kind of became a thing, and that brought one guy that posted an article on, what was it, the liquid lumberjacks or whatever. I don't want to pump their name anymore, but they put the article. up there and there was whatever happened and that post was removed and they tried again with the second stock and that was removed as well but that wasn't a case where everybody decided to all right this is how we're going to try and and play the stocks from now on now I think that it's I think it's always just been the focus if they have a stock that's a lot of focus is going to get a lot of volume it's going to get a lot of activity and I'd be surprised if they both

put them calls depending on especially right now that we're entering into a shopier market that we're going to see some more disagreements with regards to which direction these things are going to go and disagreements with regards to how to play any particular stock. Yeah, the places where I go to kind of hang my hat on this are, well, lumber liquidators is the best example because nobody in the world was talking about it. And then there was the post from someone who had been a member of Wall Street bets for three years, but it never posted anything. And that morning you saw, you know, the equivalent of the last 20 days in call options trade

in the first 20 minutes and ultimately call volumes of over 70X the 20 day average when nobody else in the world was talking about it. That's where I go to hang my hat. And Microsoft is another one because it really blew my mind that, and this was the discovery soon after the kind of the Delta hedging cheat code was first kind of bandied about more on Wall Street bets was Microsoft became a target, which is odd to me because I, you know, it's a big company and the idea that, you know, moving that would be very difficult. And the next more, morning, you did see the unusual call activity, a pre-market kind of activity that was suggested as the desired tactic that people should take up. So it mapped out a little too well.

No, so I agree with you 100%. My point is not, you know, whether or not your observations are correct, my point is as an overall community that says, hey, community, this is all what we're going to do. What you found is one actor that decided to come up with one stock, as you say, is a boring stock. It doesn't quite fit the thesis of what they usually like to talk about, comes up. And yes, he makes the post and you make the argument that he had a measurable impact on the market. So that's fine. My point is, as a community, that's not what their efforts are to be. This is this one guy that came on there with a shady history, like you said, or lack thereof and therefore, you know, the moderator team took action and not only with that particular

guy, but now a proactive action for identifying those types of individuals, but that's what they are. They're individuals. They're not necessarily as much as the collective of Wall Street bets. You know, I think the Microsoft observation, I think, is more accurate in that sense. I don't think, you know, obviously the joke around a lot and the joke, and I did see what you were talking with regards to Microsoft. Like, all right, now let's do it with Microsoft because that one is more of a stock that fits into the Wall Street Bet's portfolio of stocks that like to play with. And obviously, it would be a much harder stock to move if they were trying to do that. But they felt, you know, they went for it anyways because these stocks are volatile.

And they're, you know, oftentimes they pick these stocks because they're already on the move. And that's how they get on their radar. Jamie, I've tweeted a couple of screenshots from conversations going on in Wall Street bets. And I've had at least one instance of someone ceasing in the U.S. securities and exchange commission. And even on the subreddit itself, every once in a while people will joke and say, hello, hi, the SEC is watching that sort of thing. Do you worry about the regulators coming in and seeing some of that activity and viewing it as a pump and dump scheme? Yeah.

So ever since, you know, we started with Wall Street pets, we've always been cautious, not just with the SEC. of just with overall laws and regulations, right? So this goes all the way to anyone that's making any types of threats or any type of suicide threats or any type of considered gray area. So this dates back to 2012. This is just part of the terms of service with Reddit, and it's also part of our moral obligation as moderators. And we have a big moderator team.

We have about 50 moderators, and many of them are very experienced, and many of them are professionals that actually do have Bloomberg terminals, and they do know what they're talking about, and they're helpful with trying to identify this. So to answer your question, I'm not worried necessarily that they're going to come after Wall Street bets specifically. If they're doing any type of investigation, well, I guess they're going to make whatever kind of investigation they want to make. I know that from the moderator standpoint, we do.

everything that we can to try and be responsible with this. We do have very clear rules listed on the subreda, which include do not manipulate the market, do not attempt to manipulate the market, do not give any type of false information, do not try to pump any particular stops of stock, do not pump and dump. I mean, all this stuff that is clearly against the laws or against the regulations or against the rules, and we enforce those very strictly, and not only because they're against the laws, but it's also against the spirit of the subreddit. You know, we're all out there to try and hopefully make some money or to learn and keep the community entertaining.

And that's what we're there to do. And so long as we're doing our part to actively, proactively handle any types of things. And look, they come up all the time. You'd be surprised. A lot of them never even make out the light of day. You know, there was, for example, a couple months ago a situation in which somebody posted a link to a tour. and on the InS site, right? These are these underground dark web.

I guess you could refer to them as websites, where they're sure illegal activity because we're trying to share inside information. And not only that that postage it removed within seconds of it getting up there, we changed the logic of the moderator to make sure that it can automatically filter out any type of conversation regards any links to these tour sites or insider information. There's a lot of stuff that never makes it out to the light of day.

So if you ever wanted to make an investigation, they'd see without a reasonable doubt that we have done very much everything that we do in order to keep this place fun and legal. I'm curious. What do you see as where the typical Wall Street bets user eventually goes? Do they go broke and get so angry with the markets that they sort of walk away? or do a lot of them sort of graduate to, okay, this was their fun intro to the space, but they want to learn more about investing, or do they invest? But this is sort of like their version of gambling. Like, you know, like after, what do you see is the trajectory of a typical Wall Street bet's participants?

Well, what I see is probably not what actually happens. Once again, I'm going to take an educated guess just based off my experience. Statistically speaking, most people probably lose their money. It's just the name of the game, especially with the types of trades that they're doing. They are not only going with stock options, one of their favorite types of plays. Obviously, stock options aren't just unlike Forex or futures where you can just bet on direction. There's more variables to it, and they choose the types of variables that are the riskiest possible, the highest likelihood that they lose their money.

And so just given that common sense tells me that most people probably lose. money. That's not necessarily what we get to see on the subreddit because maybe they don't post it as much or maybe they're not as animated to give the stores or maybe they don't get as much visibility. When somebody makes millions of dollars, they do get a lot more attention. And so it's easier to make the assumption that everyone's making money. But what I have seen, which is very surprising, is a lot of people that make money, a lot of people that do end up winning these lottery tickets, turn out to be extremely rational people. obviously with exceptions, but a lot of these guys, you know, there was an example that I think

even Bloomberg covered it back in October of 2019. You know, some guy put in $700 or $760 and made over $100,000. I spoke to him as part of the book to see how he was doing it to get some of his idea behind the trade. And, you know, he immediately after making that trade closed up his brokerage account. He deposited that money into his retirement. I don't know if the IRA or the 401k or whatnot, but, you know, he said he couldn't focus on work anymore,

and he had to keep focusing on his job. So he did, and he has not, to this day, at least until last month, trade it again, nor is he interested because he knows he can't replicate it. That's, you know, that's an extreme example of him straight up closing his brokerage account, but I've seen a lot of people that make it big, take that money, stash it away, and use that money responsibly, you know, to buy a high. to invest it into these dividend, bang, ETFs, they're well-diversified.

They like to make fun of, and they're able to be responsible with the market. So, you know, my thesis at this point is a lot of these demographic, which is a lot of millennials and Generation Z, you know, they may want to actually build the nest egg and they don't have what to do it with. Maybe it's because of their student debt. Maybe it's because of wages or cost of living. I really can tell you I'm an expert in that matter, but, you know, they're looking to try and get ahead or get out of this rat race. And the ones that do, and there's been a lot of them that have made hundreds of thousands and even millions, and have decided to pull back and say, all right, now I've set aside.

I've accomplished what I want to accomplish. I don't think I can do this again. You know, I don't want to become a date trader. If they've made enough money to retire, then, you know, they do that. And if they've made enough money so that they can continue with their ordinary trade. job and invest responsibility. They've done that too. So that leaves me to believe that there's more to that group than what the surface leads people to believe. So one of the themes running through Luke's article is this question of whether or not the bets made by the subreddit, the options

trading can impact the wider market. And in your own book, Jamie, you also talk about the notion of systemic risk. So talk to us about when a bunch of people are taking these kind of levered bets on online brokerages, who's the loser here? Like, where does the lost money actually come from? And is there a chance that this could negatively impact the market if enough people do it? You know, if we're talking specifically about these options trades that Luke was referring to, you know, I guess the losers, whoever's on the other side of this bet, but it's really difficult to measure. I mean, you guys understand it just as well as I do. It's not as easy to measure is just a winner or a loser because there's a lot of things that play.

You know, the market is fluid and it goes up and it goes down, and it depends on when people enter and exit. A lot of these brokers are not necessarily just making money off the bid-esque spread. They're making money off the premium from these options. And so if they do end up buying the stocks, you know, and the stocks go up, one could argue that they're making money as well. If the entire stock market goes up and everybody is long the stock market, you know, it's difficult to argue that anyone's losing. But it's not that simple, right? You know, it happened last week and anyone that had all those shares in their possession is no longer as happy as they were two weeks ago. So, yeah, I'm not really sure.

I suppose it really depends. What about more generally? I guess what I'm getting at is if someone takes a big levered bet and, you know, they put in $1,000, make some sort of trade and they end up $10,000 or even $100,000 in the red, who's the loser on that one? And what happens to the brokerage that let that trade go through? So you have a huge number of people that are taking, that are playing with some very sophisticated tools, right?

and they're using it in ways that they don't fully understand them. And they're posing what I believe to be a systemic risk. And so, you know, some examples of this, which I find to be extremely fascinating, which was one of the biggest motivators that I had to write this book in the first place was the securities like the VIX or that revolve around the volatility index and then have ETFs on top of them, and they have leveraged ETFs, and have, you know, stock options on top of those. Those are extremely, extremely complicated.

People that know what they're doing don't know how to explain it to other people that also know what they're doing. I've noticed that in conversations. So if you have a kid that opens up his broker account on his cell phone during his lunch break and types in UVXY or TVX or whatever, you know, it's just a symbol like Apple. They don't know. They just got a price that moves up and down. and it moves up and down a lot, so it looks like fun, right? Because it seems like it's got one of the properties that requires for them to make a trade.

So maybe they'll look it up and they'll say, oh, something to do with volatility, whatever. I'm only going to hold this for a few minutes or a few days, so I could care less what the company does or what their earnings report is big tax to do. So, you know, they'll buy options on top of that because it turns of those as well. And then it'll just, you know, lever up a, you know, ridiculous amount, not realizing that there's a huge mechanism. and behind this, right? Like we all, well,

maybe you guys remember the big Volmageddon February 5th, 2018, you know, where we had an example, the, the market showed a weakness

in, because of the existence of all these tools, right? Because there's so many of these EQFs that they had to rebalance at the end of the day,

both the ones that were short, as well as the ones that were leveraged long, the big shit spiked so much that particular day that, you know, that to come four o'clock,

they were all going to have to, to buy a victory. features. And so all the participants that know this, which is pretty much everyone, they set at the front run on this during the daytime. So they drove up the VIX even further. You know, and that made part market participants even more nervous. So they ended up buying put options on the SMP, which obviously drives a VIX even higher, which, you know, made people nervous. And they started to start selling some of their stocks, which, you know, caused a bigger drop. And this feedback was disastrous. And a lot of what happened

that particular day had nothing to do with coronavirus or some. Right. You know, that, that was a complete systemic failure of these really sophisticated tools. And so now you have these kids that are, you know, there are millions of them and millions of millions, and they're using very leveraged tools to exploit these millions of millions of very complex securities. And they're plugged into, you know, this interconnected system. And yes, I believe that there is a risk of play. Once again, I'll struggle to define a winner and a loser.

But, you know, but I do worry with the fragility of the system. Jamie, before we wrap up real quickly, I have to note the sort of poetry or perfection of this moment that we're interviewing because literally, while we're talking and recording this podcast, I see that Robin Hood is experiencing an outage. So amid this extraordinary volatility that we're seeing in the market, I'm sure there are a lot of frustrated. Wall Street Betts users. They have a thing on their status page saying, right now, we are experiencing a system-wide outage. We're working to resolve this issue as soon as possible. So presumably a lot of people not able to trade, frustrated that they can't take advantage of the volatility one way or another. Kind of a perfect timing. Final question, just in terms of, I have two very quick questions for you is, one, have you yourself made money overall trading options? And two, where do you want to take

Wall Street bets, what do you see is it's a future or are you just going to sort of let the people do their thing? With options, I have not made money. I guess that's probably the first time that I've said that. The options are really tricky. And I lost a fair amount of money with them, but you know, I also learned a huge amount about the market with that. I've since moved on to different instruments that have been more profitable, but now the stock options are a tricky thing to make money with. And with regards to the direction of Wall Street bets, I guess there's twofold. Number one, you know, it has to some extent the life of its own. I haven't directed Wall Street bets into what it is now.

You know, I have let the community take it wherever it wants to go, and the moderator teams take it to where it wants to go. And so we'll see what that means for the future. And as far as what I might want to do with it, well, you might be hearing about some ideas here in a couple of weeks. I haven't got about it. Okay, great. Well, Jamie, really appreciate you joining us.

It's obviously sort of a fascinating experiment window into a psyche of at least a handful of market participants. And I really appreciate you taking your time to explain the history. and perhaps the future of Wall Street bets. Not a problem. Thank you very much for having me. Thanks, Jamie. Thanks so much, Jamie. And we want to thank Luke Cowah, of course, for coming on and walking us through the technical

details of a lot of this options trading as well as for his great Business Week cover story. So thank you to Luke Cowah as well. Oh, my pleasure, my pleasure. So one thing I was thinking about is this difference between our investing and our Wall Street. Betts. And on the one hand, you have a group of people who are sort of playing by the rules and investing a little bit of money in, you know, passive stuff like S&P 500 funds and sort of eking out little returns every once in a while. And then you have the R Wall Street Betts people who are making this big money and sort of, well, big money and big losses and also trying to find

cheat codes to exploit the system. And I guess the big question that I'm thinking, now is which one of those should the stock market be? Like, there's an argument that the stock market or the market in general should be about efficiently allocating companies capital or capital to companies. And I don't know. I could sort of argue it both ways. Yeah, absolutely. I think both need to exist. And, you know, there's always been this spectrum in any given market, right, between the sort of pure speculation, short-term gambling, and the longer-term fundamental investing mentality. And we did some episodes recently looking at how the sort of pure, long-term, passive, investing

mentality has been gone to a very large extreme with people not taking any risks of individual stock selection or market timing and just blindly buying the entire index, every paycheck. And so it's not surprising that if the sort of long-term... term passive approach is getting more and more extreme, more and more vanilla, that you would then see the sort of mirror image happening on the other end. And so then you see the people who do try to, like, quote, beat the market or take idiosyncratic security risk going absolutely to the extreme the other way. And what you get is you sort of hollow out that middle of the old days of like, you know, people buying 30 stocks for their portfolio. That's the part that seems really quaint.

Yeah, yeah, stuff like that. Yeah, it's sort of two extremes at the end of a sort of barbell, I guess. The other thing I'm wondering is, you know, it's fine to see people taking these sorts of bets and blowing up their Robin Hood accounts as long as it's their own money and as long as it doesn't affect the wider market. But then the point that Jamie touched on at the end, which is we do have some instances where options trading has impacted the underlying index such as XIV. and the VIX back in Volmageddon. And again, we mentioned the Robin Hood blowout at the end. And you sort of have to think whether or not a lot of the brokerages and the zero commission trading are encouraging a race to the bottom when it comes to enabling these sorts of levered vets. A, yes.

But B, I'll just say, you know, for as big as they are, you know, there are institutions that are 10 times bigger throughout history established. serious respectable institutions where people have PhDs and write equations and they all wear a tie to work that have caused far more damage than anything on the message board. So while I'm sure that is a potential phenomenon, if Wall Street Beds did create some sort of endogenous volatility, they would not be the first by any stretch. No, that is totally a fair point. And no ties or PhDs, presumably on Wall Street Bets. I got to say, one thing. There are probably a few. out to be fair. Well, yeah, okay. Well, that kind of brought me to my last point, which was in Jamie's book, the guy that lost a bunch of money on XIV who was on Wall Street Betts, I think this was the

biggest loss ever on Wall Street Betts. Jamie says he ended up working for a unnamed financial institution. So there is some overlap between professional finance and Wall Street Vets. He wouldn't be the first person who made his name and career by losing a lot of money. Somehow I feel like in finance, if you lose a little bit money, you're in trouble. If you lose a lot of money, you can probably, you know, find a new job and do something else. Yeah. So weird and yet so true. Okay.

This has been another episode of the Allotts podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthall. You can follow me on Twitter at The Stallwart. And you should follow our colleague, Luke Kawa, on Twitter at LJ Kawa, and follow Jamie on Twitter. He has the handle at Wall Street Betts.

And be sure to follow our producer on Twitter, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcasts. Francesca Levy at Francesca Today. And for all the Bloomberg podcasts, check them out under the handle at podcasts. Thanks for listening. June Grasso, inviting you to join me for the Bloomberg Law Podcast. Every weekday, we help you make sense of the legal stories that shape the nation and the world.

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