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‘Small army’ of online investors drives stock market frenzy

Part of Wednesday's market frenzy was not just a plunge due to the concerns over the pandemic. There's been major tumult in recent days as individual investors and young day traders upend the market and send prices of a few struggling companies soaring. Andrew Ross Sorkin, co-anchor for CNBC'S Squawk Box and a New York Times columnist, joins William Brangham to discuss.

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  • Judy Woodruff:

    Part of this today's market frenzy was not just a plunge due to concerns over the pandemic and the economy. There's been major tumult today and in recent days as individual investors and young day traders are upending the market and sending prices of a few companies soaring, companies that were struggling just days or weeks ago.

    William Brangham has more.

  • William Brangham:

    That's right, Judy.

    The traders who are driving this frenzy and egging each other on social media have been driving up the price of several stocks long after other investors had looked at those companies and said, we're done.

    For example, they have sent the price of video game retailer GameStop to stratospheric levels. And the frenzy continued today with a surge in the stock price of the movie chain AMC, as well as the ones popular phone maker BlackBerry.

    To help us understand what's going on. I'm joined now by Andrew Ross Sorkin. He is the co-anchor of CNBC's "Squawk Box," a columnist for The New York Times, as well as an editor of its Day Book newsletter.

    Andrew Ross Sorkin, great to have you back on the "NewsHour."

    Such wild developments in the market today. Can you just help us understand, what on earth is going on?

  • Andrew Ross Sorkin:

    It's hard to understand. And it is a wild, wild story. I don't think I have ever seen anything like this in my career, frankly.

    There is a small group, almost a small army, if you will, of mostly younger folks who are assembling online in chat groups and are bidding up the shares of companies like GameStop. GameStop was a company that was worth $20 a share at the beginning of this year. Today, it's worth almost $350 a share.

    The company is now worth the same as Delta. This company makes no money. There's an almost Ponzi scheme-like element to this. It was originally driven by a nostalgia for GameStop by some of the investors and a stick-it-to-the-man kind of view that the system was rigged against companies like GameStop, and that the system was rigged against retail investors.

    A number of the big Wall Street hedge funds had actually bet against GameStop shares. So, they were betting the shares would go down. And these other investors were trying to effectively win the game and make them lose.

    And, at the moment, they are winning. But I would just caution those who are out there today, the greatest likelihood is that these protesters will be the ones who will ultimately lose, because there's no fundamentals behind the kinds of trades that are going on at this point.

  • William Brangham:

    So, just so I understand this, these smaller traders seem to know that the bigger hedge funds had these basically short-selling options on these companies.

  • Andrew Ross Sorkin:

    Yes.

  • William Brangham:

    And they — the bigger investors were hoping the stock prices would go down. They're reversing that trend and driving the stock up.

    How does that reversal of fortune hurt the bigger investors?

  • Andrew Ross Sorkin:

    Well, in truth, it hurts the bigger investors, insomuch as the hedge funds lose money. In one case, a

    In one case, a big hedge fund has now lost several billion dollars and needed to be rescued as a result of this.

    But what I'm not sure the — quote, unquote — "protesters" that are that are doing this fully appreciate is, the hedge funds are managing the money of pensioners. So, when you really think about who's lost, at least thus far in this — and it shouldn't be considered a game in this winning and losing way — but, so far, the hedge funds have lost, the Wall Street hedge funds have lost, but they have effectively lost pensioners' money.

  • William Brangham:

    There has been this talk, as you well know, for years about whether or not day traders are actually consequential in the market.

    And it's hard not to look at what's been going on over these last days and weeks and think, they are consequential. They are able to move the market in a substantial way. Do you think that this does change something fundamentally?

  • Andrew Ross Sorkin:

    Well, I think there's two things going on.

    I think they were substantial in moving the market to a degree. But like any great protest, they often get co-opted by others. And there is — or there are professional investors now today that are also bidding up the shares of GameStop as part of almost a pop psychology play.

    And so it's exacerbating what's happening. So, yes, a small group of investor has clearly moved market to some degree, but coming on top of that are professional investors who effectively are trying to take advantage of those folks.

    And so it's going to be very interesting to see how this all unravels itself.

  • William Brangham:

    Elizabeth Warren and others have said, look, a lot of these big-time investors have treated the stock market like a casino for years, she argues, and now they're complaining, and, basically, she's saying boo-hoo for them.

    Her other point for her is now is the time for financial regulators to step up and address this. It's not clear to me, though, what is the role for a financial regulator in this circumstance? What would a financial regulator do?

  • Andrew Ross Sorkin:

    It's complicated.

    First of all, Elizabeth Warren is 100 percent correct. And so many of the people with her — so many of the people buying up shares of GameStop agree with her. They're saying the system is rigged, and they are saying, we are manipulating it, but we have been manipulated for so very many years.

    The question you asked, how do you regulate this, what are the regulators supposed to do, is a real question without a great answer, because it's not clear what's being done here is illegal. It's all actually being done, for the most part, out in the open. You can go online and see these people talking to each other.

    You can argue maybe it's a pump-and-dump scheme, but it's being done quite publicly. And so I think the regulators are going to have to grapple with this. Gary Gensler, who has been nominated to run the SEC, is going to have a pretty hard job on his hands to figure out how to — what to do.

    I will make one mention. Some of the big brokerage firms are starting to limit the amount of leverage, the amount of loaned money that they're providing to some of these investors for specific stocks like GameStop. So, that could reduce some of the interest in pursuing these type of events.

  • William Brangham:

    All right, Andrew Ross Sorkin, thanks for helping us get through this very, very strange case.

  • Andrew Ross Sorkin:

    It's a complicated one.

    Thanks.

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