Rovell: An Expert’s Take on GameStop Stock Controversy, Comparisons to Sports Betting
CHRIS DELMAS/AFP via Getty Images. Pictured: GameStop
The biggest story on the internet a week before the Super Bowl is GameStop stock.
Since it’s a fairly complex game of chess moves while certainly having basis in the gambling world, we wanted to find someone who could simplify it all.
That man is Tom Sosnoff, founder and co-CEO of TastyTrade, a financial network that’s tied to a trading platform that was recently sold for $1 billion.
Tom participated in a Q-and-A with The Action Network to cover the biggest questions surrounding the week’s news in the stock market.
Some questions and answers were edited for brevity.
Darren Rovell: There is nothing wrong — per the Securities and Exchange Commission — with someone taking a blank vessel of a stock where it’s not related to earnings and pumping up that stock as long as it’s not based on fraud. Is that what makes this uncomfortable?
Tom Sosnoff: You have to look at the totality of the markets and the reason the SEC does not get involved in a situation like this — or shouldn’t get involved — is because their only job is to ensure that the markets are fair and efficient and that the markets are trading based on whatever is public. Meaning there’s not some non-material insider information that has been leaked.
In the case of GameStop, this is not an everyday occurrence. This is probably the perfect storm. You had a stock — everybody hated it. The short interest was greater than the actual float. There was a situation where the few institutional investors were really strong hands.
Well, the individual investors finally “Woke the F up,” as they say. We finally got a social wave. A crowd. And they found the perfect stock in the perfect storm in the perfect speculative environment. Everybody at home, with lots of people, they could trade it because it was a cheap stock and it worked.
I don’t think it was something you’re going to see again. I don’t think it’s something that’s going to change the way we trade. It was just a crazy, perfect storm.
Rovell: Why did it happen now?
Sosnoff: Everyone’s been to this store before. It’s a dumpy store. You’re scared to put your feet on the carpet. It’s like a pawn shop. So when you think about this as an institutional investor, you’re like, “GameStop? I’m not buying a share of that stock.”
None of the big players want to own any GameStop. So a bunch of big, speculative strong hands owned most of the long stock. The short stock was owned by every junkie hedge fund in the world who thought that, “Hey, you know what, this stock isn’t going anywhere, except out of business.” And, all of a sudden, that made for a very combustible situation where basically someone just lit a fire and the whole thing blew up.
I’m telling you this is not something that you can go out and recreate tomorrow. This is something that is a one-off. It’s going to be really hard to find that ever again.
Rovell: Robinhood and TD Ameritrade caused a stir when, despite the fact that the market was ongoing, halted the trading for their customers. Did that surprise you?
Sosnoff: First of all, I don’t believe that the game is rigged against the individual investors. I think that’s bullshit. But when big firms like Robinhood or TD or (Charles) Schwab shut down their platform for risk purposes, and don’t give customers access to trade something they’re already involved in position wise, I have a problem with that. If you’re gonna be a brokerage firm, you stay open. The market-making firms were making markets. The markets were liquid; they were efficient. Other than a regulatory issue there was no reason to close down, period.
Rovell: The fact that people were running the stock up, it doesn’t make sense. This doesn’t have to do with GameStop as a company. How do people who participated in doing it get out?
Sosnoff: That’s the problem with this kind of situation. The stock is trading for $20 and the next thing you know it peaks out two weeks later at $500. Obviously GameStop isn’t worth $50 billion. It probably isn’t worth $2 billion. So at some point, unless you are completely braindead, you have to realize that you are playing in a pyramid scheme “House of Cards” type thing. And at some point, if you are banking on forcing shorts to cover on a short squeeze, if you don’t sell out way before you get to what that ultimate peak was, you are crazy. That’s on you. But if you’re gonna play that game, know the game you’re playing. I don’t think there’s a person in the world that doesn’t think that GameStop is going back to under $50. The question is when? And do I have a chance to get out higher, fast? It’s a game.
Rovell: Does what happened trigger anyone to say “This is not the game I want to play in?”
Sosnoff: No. In fact, I’m going to tell you it’s the exact opposite.
Rovell: Get out of here.
Sosnoff: This is to trading what fantasy football was to sports gambling. Whether you like Robinhood or not. Whether you like this kind of activity in the markets or not. What we’ve done is we’ve opened finance to an entire generation.
Last night, I spent an hour on the phone with my son, who is 27-28, and for the first time ever, we talked trading the whole night. We have opened the world up to finance to an entirely new generation. And it’s exciting.
This is what happens when you, call it democratize, commoditize, an industry. It’s about time that finance is out of the hands of old guys in suits and investments advisors at the country club and all that kind of bullshit. Now we’re in the hands of the people it should be in.
Rovell: It might be a one-off situation, but is this a paradigm shift.
Sosnoff: I think it is. If you don’t get introduced to finance early, you’re 25 and one day you wake up and you’re 50 and you’re like, “Where did my life go, and I don’t know what to do now, I’m 50.”
When I was 22, I’d go to Vegas and blow a couple grand in the sportsbook at Caesars or playing blackjack. So now they blow a couple grand on GameStop stock or AMC or something else. They are forever better off.
Rovell: Because they actually learned something. You didn’t.
Sosnoff: All I learned is that when the dealer has aces, they don’t split them, they just pull a “9” for a 21.
Rovell: How do you feel about the stock market versus sports in terms of fairness?
Sosnoff: I argue that the stock market is 1,000 times more fair than sports only because of the narrower spread between the bid and the ask. So the bid ask differential in finance is a tenth of a penny. The bid ask differential in sports is 10 percent. That is 1,000 times better.
Rovell: Right. Because you are automatically losing more at the start.
Sosnoff: This particular event was Leicester City winning the Premier League at 5000-1. GameStop was a 5000-1 Leicester City play.
Rovell: As far as regulation, do you think Wall Street is still beating sports betting?
Sosnoff: Sports betting, in my opinion, is over-regulated. But I understand the size constraints because sports betting is relatively small. And in the financial world, everything is massive. But, every once in a while, you’ll run into a small market underling like GameStop. And when you get a massive amount of money into it, that’s what happens. What would have happened to Leicester City (odds) if every kid in the world had taken the 5000-1 shot? It would have gone down to 2-1.
Rovell: So what has happened here, you believe is a net positive?
Sosnoff: I think the market overall is better for all these participants talking about the market. Because I believe finance needed to be essentially commoditized. I believe it needs to be a part of my kid’s life, your kid’s life. I don’t think everyone should wait until their 50s and 60s to learn what a bond or a stock is. How do I use this technology? The stuff is too cool today. The content is too good.