Reddit-fueled saga a ‘very poor way to stick it to the man’, says expert
Steve Sosnick, chief strategist at Interactive Brokers, joins Yahoo Finance Live to discuss recent market action, including the Reddit-driven investing mania.
Video Transcript
- Let's stay on the market, and talk a bit more about everything going on. Joining us, old friend Steve Sosnick. He's the chief strategist over at Interactive Brokers. Steve, where do you want to start with this whole thing? Because the story seems every day to kind of change, and what we know, what we think we know, what it means, what it doesn't. As we sit here today, what's your biggest takeaway so far from this entire Robinhood, Reddit short squeeze saga?
STEVE SOSNICK: Well, first of all, good to see you, Myles, on a snowy Monday. It's a very tough takeaway because there's so many moving parts here. I guess my biggest thought is it's not-- there's not-- nothing that's that new about this. There have been short squeezes ever since there have been shorts. There have been manias even before that, probably.
And what I think the difference now is it's the nature of it. And in each different bubble or mania, whatever, the methodology-- the methodology changes. We're not getting tulip bulbs from Turkey this time, we're getting stocks that had been left for dead in the malls now. And well, actually, that was last week, and now we're finding silver stocks that, you know-- it's the silver that's in grandma's attic is now what's rallying.
It changes, but I think the difference is, you know, it's moving faster and in a bigger way because of technological changes, the changes in social media. We're not using Yahoo and AOL message boards that we did in 1999. We're using-- we're using Reddit and other forms. It's an older game, it's just-- it just changes form every so often.
- And Steve, it's good to see you. It's Julie here. So do you think that the Redditors' reported sort of ire at Wall Street or, you know, feeling like the system is stacked against them, do you think that that is misplaced? Is that similar to some of the manias that we've seen in the past also?
STEVE SOSNICK: Well, Julie, there's two parts to unpack. I think the-- what we're seeing actually is populism in the markets, I, in a piece I wrote not that long ago, I compared it to the run at the Capitol. It's that same sort of anger manifesting itself, and this time through the markets.
I do think it's misplaced because, you know, if your enemy is Citadel, they had a fab-- I assume they had a fabulous week market making in these same stocks that they were trying to rip them on. This is a much more subtle feature than, you know, stick it to the man. This is actually a very poor way to stick it to the man. I have no problem, zero problem, absolutely love the fact that individuals are coming into markets and see them as an opportunity to make money and as a source of investment.
What frustrates me is that they're kind of getting abused, and that there will be a lot of little guys left holding the bag when this is all done. And that's the very frustrating part. But I think this is-- you know, one of the differences is that we have a populist mindset throughout the country and the world right now. And this is one of the ways it's been manifesting itself.
- You're right, Steve. A lot of the small investors will eventually be heard. And on that point, how would-- if you're an executive at a GameStop or a BlackBerry or Koss Corporation-- nobody even heard that company three weeks ago-- how should you be communicating with investors right now?
STEVE SOSNICK: Well, Brian, I think some of it is-- it's a little bit tough. I think what AMC did is-- was right out of the playbook. You know, the stock got moving actually there because of fundamental good news. They avoided going bankrupt. That is pretty much the ultimate good news. You know, they then used that rally to sell enough shares that really paid off the bonds that prevented them to go bankrupt in the first place. That's fabulous.
From what I understand, I believe GameStop is in its quiet period ahead of earnings, so I think they can't really do much. I mean, if I were these companies and could, it would seem logical to sell-- to sell into some of these valuations. It doesn't make-- if you thought GameStop was maybe a bit undervalued at 17, it's kind of hard not to think that it's a bit overvalued at 300-ish. So that would be the way to go. And I don't know about the messaging, but the fact that it comes at earnings season I think makes it harder for a lot of these companies to message, because in some cases, they can't say much with earnings expected soon. That's a weird irony.
- Yeah. And I want to talk about one of the targets now that's not a company at all, although, to your earlier point, by the way, about this being a poor way to stick it to the man and Citadel's returns, interesting note in one of the stories this morning about Melvin Capital's losses in January. The same story said Citadel's returns fell 3% in January, but it was very specific, its hedge fund returns. It did not talk about its overall market making returns. But let's talk silver for a moment. How is this trade going to play out? Because silver is a whole different ball game than a little one-time penny stock like GameStop.
STEVE SOSNICK: Yeah. Doing this in a commodity is going to be very different. So if people are attracted to the trade because there are some small silver stocks that have short interest or the SLV ETF has high short interest, that's only a fraction of the puzzle here. The difference between a physical commodity and stocks is that, first of all, physical commodities are much more pure supply and demand. And you would think that should benefit, you know, this wave of investment coming in, because that's pure supply-- pure demand versus supply.
The problem is supply comes out of the weirdest places. And I actually did look have to Hunt Brothers saga of the late '70s, early '80s. I heard Jared refer to it earlier. It's older than-- it's older than he thought. It's the late '70s, early '80s. And you know, I was sort of-- I was not in the markets at that point, but my dad was, and I remember hearing about all this stuff.
And you know, one of the interesting situations is they got the commodity moving, they used a ton of leverage through futures and options-- not options, really, futures-- but then guess what happened? The clearinghouses basically put position limits and stopped new purchases. Does that sound familiar to anybody? Yes, because clearinghouses have to protect themselves and their members and the system. And eventually, it started to fall under its own weight.
And one of the things that's interesting about my company, which Interactive Brokers now, started as Timber Hill, but Thomas Peterffy worked for a guy named Henry Jarecki, who ran a company called Mocatta Metals. This is how he got started. And I'd heard crazy stories about him paying toll authorities, you know, 10.1 cents for all their dimes because some of the dimes had silver. Silver can come out of the weirdest places.
There's silver in all kinds of people's attics and basements that the families had been wondering what to do with. So this is going to be a very tough one. It's not like Bitcoin we created out of thin air. It's not-- well, or it's mined virtually. It's not a stock, where a company sort of has supply and demand, but you know where all the stock is. You don't know where all the silver is. It's in all the weird places. And a lot of it's controlled by industrial users who are non-financial, which is-- so it's-- you're really getting far out over your skis.
And the biggest worry here is this one's been tried before and failed. And there's an actual playbook for this. And it's really easy to read up on this. Anybody who sort of came into the industry in the late '80s, you know, in the '80s, this was still in the collective memory. But you know, so may have been forgotten, particularly to some of the younger people. But this is there. It's an interesting feature.
- And you know, Steve, just quickly before I let you go, coming back to the stock market and some of the dynamics that really came up last week, we've all now had to become quasi-experts on T plus T settlement, and sort of the role that plays in the actual execution of trades. Certainly something that, you know, this is the core of Interactive Brokers' business. Where does that fit into this story, and do you-- I mean, there's calls now for we need to go to T plus 0, but I feel like people have no idea why T plus 2 is important and what it's there to really do.
STEVE SOSNICK: Well, T plus 2, just for, you know, for the viewers who aren't used to the terminology, means that you buy a stock today, you pay for it in two days. The settlement occurs in two days. Now, from talking to clearing people over the years, they want this period shortened. It's been getting shorter and shorter over time. You know, it was T plus 5, then it was T plus 3.
Each day that you take out of the settlement cycle, in theory, reduces the risk to the system because there's that much less that can go wrong in two days than in five days, for example. Although I think what we're seeing now is there may be some advantages to not having it go T plus 1 or T plus 0, which I guess is theoretically possible. If you use blockchain, in theory, you could do it in T plus 0. But I don't even want to get into that one.
But what I realize now is I think that T plus 2 gave the system a little time in which to orient itself. I think, without going too much, you know, I think that these clearinghouses were able to see what was going on, what was anticipated in terms of liabilities and deliveries and money that was coming down the pipe, and allowed some of the brokers that might have had some issues in that regard to adjust.
This points out, you know, the difference in capital. You know, I can't speak too much to it, but you know, a well-capitalized broker didn't have a lot of problems with obligations, but had problems with the clearinghouse imposing those obligations. And in terms of worries, about whether all the clearing members could settle on time, because a failure by one member is borne by the other members in the clearinghouse system.
And so what I think, we're going to get some interesting debates. There's going to be a lot of stuff that's brought up in terms of regulatory cycles, in terms of Congress. Not all of it pleasant for the industry because a lot of it gets poking around in places you don't expect. This is going to be one of the more arcane elements that's going to come up.
And I think we're going to start to hear from some people who are much more expert in the clearing process than I will what is the right amount of time. Is it T plus 0, is it T plus 1, is it T plus 2. I think the industry sort of did reasonably well here with T plus 2, despite all the obvious issues in terms of some of the worries that went into, you know, with stocks getting halted, essentially, and things of that nature.
- Yeah, and I mean, I think, you know, Robinhood's mission, you know, they say it's democratizing, but they kind of gamified trading in the market. And I think we've found out it's not a game. And you know, next time when we have like three hours, we can talk about whether the industry's building the foundation on margin even makes T plus 0 possible because, you know, margin requires a certain amount of time to actually score out. But Steve, we'll save that one for maybe a couple of years.
STEVE SOSNICK: I'll look forward to having a full hour with you on that one, Myles.
- There we go. All right, Steve Sosnick is the chief strategist over at Interactive Brokers. Steve, always great to get your thoughts.
