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‘Robinhood is a brand here to stay:’ Kevin O'Leary

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Yahoo Finance’s Alexis Christoforous and Kevin O'Leary, Chairman of O’Shares ETFs, discuss Robinhood and the short-squeeze frenzy.

Video Transcript

ALEXIS CHRISTOFOROUS: All right, welcome back to Yahoo Finance Live. The so-called Reddit short squeeze, the frenzied trading we saw last week in heavily shorted stocks like GameStop and AMC caught the eye of regulators and lawmakers. So what, if anything, should be done about it? Joining me now to discuss that and more is "Shark Tank's" Kevin O'Leary. He's also chairman of O'Shares ETFs.

Kevin, always good to see you. So look, what happened last week, some people are saying that is dangerous for the overall market. Do you think that it does highlight some pain points that we need to address?

KEVIN O'LEARY: No, not at all. Any time there's volatility in the markets, you get an outcry from lots of politicians who are seeking airtime on social media and television. I don't blame them. They're constantly in a mode of raising money, and this is a great issue. The fact is, though, the market has to be a very broad and wide vehicle. Because for some people, investing means a millisecond, and for others, it means a decade. And we need to accommodate all of them.

The best thing we can do and continue to do and we're getting very good at it as a market-- we are the envy of the world, the New York Stock Exchange and the NASDAQ-- is just to continue to shine transparency on positions. And now there's a new risk in the market. If you go short-- and obviously, under certain circumstances, you have to disclose it-- you're going to get hunted down by the social media, let's call them vigilantes, whatever you want to call them. It's just a new risk now.

And so, being short is very hard because your downside is unlimited. You buy a stock at $100, it goes to 0, you lose $100. You're short a stock at 100, and it goes to 1,000. That's just the beginning of your pain. It can keep going up. And so the whole point is market players know that.

I think what we learn, though, which I think is really important is that the assumption that the Reddit crowd and the Robinhood crowd were idiots and didn't know what they were doing and were stupid is incorrect. Read those blogs. These are smart people. And they actually organize together and went after these shorts and caused major pain-- I mean major pain.

On Wall Street, what matters, if you want to define power, is money. And when you cause a billion dollar downside to any institution, you've got power. And now this cohort has power.

ALEXIS CHRISTOFOROUS: Does the issue of shorting a stock, though, need to be addressed, not just for the big hedge funds, not for the small amateur investors, but for everybody across the board?

KEVIN O'LEARY: No. Short's an important aspect to the market. It always has been. Some people call it distasteful or evil. It's irrelevant. I actually like it when I take a company public and I see a short position build. That's just delayed buying. I'm OK with it. And you have to be able to hedge your position. You might short Schlumberger and go long Chevron. There's all kinds of strategies with shorting.

The fact is that nobody saw this coming. Nobody saw two things emerging. They were on parallel paths, and then all of a sudden, they merged. One was the fact that this entity called Robinhood did something extraordinary. And let's talk about that for a second because for decades, we have ignored people that did not have a significant amount of capital to put into either an online brokerage or a money center bank. They don't want those accounts. They're not profitable.

And along comes Robinhood who says, I'm going to democratize this. If you have $200 to invest, come on in. We'll help you. Now why this is important-- and I know everybody's trying to vilify the Robinhood platform, but I'm not. I think it's fantastic. We've got 100 million Americans that do not have anything set aside for retirement. And along comes a platform that says, I'll help you learn how to do this.

Now you may not like day trading, but you may think it's bad to learn that way. But the fact is that now we've got 16 million accounts that are learning something about the market. And the real opportunity for Robinhood is to actually take some portion of these day traders and turn them into long-term investors by maybe taking 10% of their winnings and indexing it for the long run and starting to save for themselves for down the road. Because if you put just $400 a month aside and your average salary is just $56,000, you'll have a million and a half dollars in the bank when you retire if the market continues to give 6% to 8% a year over the long run, which I think it will.

But what happened that was the surprise, at the same time Robinhood was building this extraordinary base of accounts, Reddit and Wall Street Bets was emerging as a powerhouse in communications amongst people that wanted to trade-- trading ideas and stock ideas. They merged together. They caused an explosion atomic in size. And now, who's the new sophisticated investor?

ALEXIS CHRISTOFOROUS: Exactly.

KEVIN O'LEARY: I just think it's really incredible.

ALEXIS CHRISTOFOROUS: You know, of course, Robinhood and a few other brokers, Interactive Brokers as well and a couple of others, had to restrict trading in some of these heavily shorted stocks. There was a big backlash. Lots of folks said they were going to leave the platform. That didn't really come to fruition, though, because downloads of Robinhood's app actually hit a record high last week amidst all this stuff. If you had your money in Robinhood, if you had an account there, Kevin, would you take it out now because of what happened?

KEVIN O'LEARY: No, I think Robinhood is a brand here to stay and the envy of every money center bank and every wirehouse and every online broker. No one has ever got 16 million accounts this quickly. I mean, it's extraordinary. They just came out of the blue, and they're doing something very important. And I know everybody and their dog is trying to vilify them. But they've done something very important for America. They're going to be able to sustain over time. They've got an amazing brand.

And they are going to start-- the opportunity to really add value is to actually take those accounts and start to build other products and services, like ETFs and maybe mutual funds and maybe money market funds. So the AUN builds up, and you get real investors for 10% or 20% of that 16 million plus growing accounts. I mean, if any of the major banks could have done this, they would have. They're envious. And all of a sudden, in a couple of years, you're going to see Robinhood as a major player competing against them in a way that no one thought was possible.

That's what I love about democratization. That's what I love about the internet. That's what I love about social media. Just shine the light of transparency on it and may the best competitors win. That's always been what's great about financial markets. And because we're highly regulated-- and I'm a participant in it-- I really want transparency. I want the investors to feel that it's not rigged because it isn't. And the last thing we need is another politician saying, I've got the solution. Hi, I'm here from the government, and I'm here to help you. No thanks. Let the markets be the markets.

ALEXIS CHRISTOFOROUS: All right, listen, you're fired up. I love it.