Quick quiz: What do Virgin Galactic and Plug Power have in common?
On the face of it they are totally unrelated companies. The former offers day-trips to space for the unspeakably wealthy, the latter hydrogen fuel systems for equipment and electric cars. But both soared double digits Wednesday on seemingly no news:
What they share is that both have become the object of co-ordinated buying by users on the Reddit forum r/wallstreetbets. If you’re not familiar with this particular corner of the world’s most popular messageboard, it’s where retail punters go to discuss their punts, and much more besides. “Like 4chan found a Bloomberg terminal,” as the website accurately describes itself.
Scroll through it today and you’ll find dozens of posts boasting of giant gains on call options and straight equity purchases with Virgin Galactic and Plug Power, along with punter-favourites Tesla, Nvidia and AMD.
Like this one intelligent investor:
Normally retail investor activity is but a drop in the ocean in the $30tn US equity market. Not this time. The behaviour is so pronounced that options trading has been showing up in aggregate market data, as Jennifer Ablan reported Wednesday:
While the S&P 500, Dow and Nasdaq have surged to record highs in recent weeks, another rally has taken hold. The US options market has been experiencing a huge jump in trading — led by large-capitalisation companies including Tesla, Amazon, Apple, Google, Microsoft and Disney, according to analysts at Goldman Sachs.
Vishal Vivek, equity derivatives strategist at the New York-based bank, noted that trading volumes in US options were now almost as high as volumes on the underlying stocks, at 91 per cent. That is the highest level in at least the past 14 years, and about three times the equivalent percentage in 2016.
These co-ordinated attempts to take a stock “to the moon” does call into question whether it constitutes market manipulation.
After all, nearly every time a company’s share price collapses hurt executives, shareholders and government point the finger at a “bear attack” by evil short-sellers. Often taking legal or market measures to try and shut down the selling. But what about when a price shoots higher? Silence so far.
Question is: will the exchanges and regulators feel the need to do anything about it?
Oversight of US equities trading is a strange beast. Technically it is run by the Securities and Exchange Commission but fully-regulated exchanges like the New York Stock Exchange, Nasdaq and CBOE Global Markets have a quasi-governmental status too.
All parties are governed by the Exchange Act of 1934, and on the first page one value seems eternal:
...there is an important national interest in maintaining fair and orderly securities trading, assuring the fairness of securities transactions and markets and protecting investors.
That stipulation is in part to ensure trades are done in an economically efficient way and that there’s fair competition between all. But it’s also to ensure: “the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities.”
You could argue that a bunch of people publicly discussing their plans on a free website qualifies on that score.
However, on the “fair and orderly” stipulation, the Reddit bull attacks arguably fail the test. There isn’t anything orderly about a stock exploding just because a bunch of retail investors decide they want it to.
To what degree the swing to commission free trading in the US has helped to fuel this collective behaviour is another thing worth bearing in mind.
In that context, what can regulators do? One thing they might want to look at is who exactly is posting on these websites.
During the dotcom boom, Yahoo message-boards and AOL chat rooms were the Reddit-equivalent. But, as we found out after the fact, not everyone was an impartial observer.
Take the story of John Freeman, who in the late ‘90s worked as a temp at banks like Goldman Sachs and JPMorgan. There, he became aware of mergers and acquisitions long before they happened, which he shared with his pals online. The game was up, according to Dan Davies’ book Lying for Money, when the SEC realised a giant flow of prescient market orders for a takeover target were coming through one stockbroker in Bowling Green, Kentucky.
FT Alphaville is not suggesting the same thing is happening here — after all, these bets are placed purely, it seems, “for the lols”. But then again, what’s to stop one company insider, desperate for whatever reason to make their stock rise, faking a screenshot of a giant call option trade on the site in the hope the herd follows? Not much, we suggest.
On the face of it Reddit users don’t appear to be aware of what they’re doing. Here’s one quote from a user looking to pump Microsoft’s stock:
Also if this happens to be illegal, I don't know about it so I'm safe.
This is the internet, so who really knows anything. If the quote is genuine, FT Alphaville isn’t sure the rationale will hold a lot of water if and when officials come knocking.
Related Links:
Record Wall Street rally triggers boom in options — FT
When “commission-free trading” isn’t (really) free — FT Alphaville
On the economic weaponisation of troll armies - FT Alphaville
Copyright The Financial Times Limited . All rights reserved. Please don't copy articles from FT.com and redistribute by email or post to the web.