Stock traders hit with own tools
Through no effort of its own, the founding family’s stake in Milwaukee headphone-maker Koss Corp. swelled to as much as $662 million from $17 million over four trading days this week.
The Koss family’s fortunes are a fitting representation of the disruption — and unintended consequences — that unfolded as upstart millennial traders took a swipe at Wall Street.
The traders, communicating on Reddit and other online forums, fomented buying in Koss, GameStop, AMC Entertainment, Tootsie Roll and other stocks with low share prices and trading volume, and in many cases heavy short selling.
Hedge funds that bet on price declines by selling short lost big. Melvin Capital, for example, was so wounded by GameStop’s price runup, that it needed a $2.75 billion cash infusion from some of its industry pals.
Should you hold or sell your stocks? Should the Koss family take profits now; sell more shares to raise capital at higher prices? Having talked with hundreds of money managers over decades, you might think I’d jump into these investor issues.
Nah. This feels different. It’s Occupy Wall Street 2.0. A push that may not change the world immediately but will keep trying. A critical mass of millennials using internet tools and Wall Street strategies to take another poke at the pig.
I don’t blame them. They’ve exposed vulnerabilities; they’re scratching at bigger problems in the markets.
The stock market was intended to provide money for growing companies and support our expanding economy. But it’s become a pool of excess capital driven by high-frequency trading, fees that rise with stock prices and an endless supply of options and derivatives several steps removed from the real economy.
The Federal Reserve is amplifying the casino-like environment by keeping interest rates low — making easy money available to players like hedge funds that borrow big to magnify small gains.
“With interest rates at near zero almost any leveraged trade makes sense,” one veteran investor told me.
The Securities and Exchange Commission ceded a big chunk of oversight to what it has deemed a “self-regulated” industry. Regarding what’s left, one high-ranking SEC official told me many years ago that the agency’s hands are tied. We meet with Congress to recommend fair regulatory strategies that have teeth and as we’re leaving, five
Wall Street suits walk in with their wallets open, he told me. Some are likely former or future Treasury secretaries.
The SEC’s 2007 margin changes that increased the amount investors can borrow to buy stocks fuel the gaming behavior. And loose disclosure requirements keep things murky.
Bottom line: Today’s stock market is a giant feeding trough for people in the financial services industry.
So along come the millennials, sights set on the much-wealthier-than-them crowd, flocking to Robinhood, a no-fee trading app, to buy Koss, GameStop and the others. And they take the Wall Streeters to the hoop.
On some level, the upstart traders are seeing that:
• In this pandemic, a 100-year event that has the economy under great stress, there are thousands of Wall Street gamers whose sole focus is to make a killing off it.
• We’ve commoditized the value of the real economy and inflated the value of the financial assets that supposedly represent it. The stock market is an increasingly parallel universe that doesn’t represent our economy anymore.
• A market moving in milliseconds allows Wall Street gamers to skim billions of dollars of value out of the economy without providing any societal benefit.
Meanwhile, the rapid trading does nothing for the Wisconsin widget-maker, the Iowa corn farmer and the Indiana medical device company that operate in human time.
Wall Streeters aren’t as smart as they want us to think, and the Robinhood crowd is proving it. Wall Street gamers make the rules, so it’s not surprising they’re upset.
There’s talk that the GameStop gang will face consequences.
“Something like this is a nail that’s sticking out and it’s going to get pounded,” a hedge fund manager told me.
But from a securities law standpoint, it would be difficult to accuse the upstarts of collusion.
Consider Roaring Kitty, the 34-yearold Massachusetts man who became one of the biggest social media influencers for GameStop, touting it in tweets, TikTok videos and YouTube videos and posting screenshots of his returns. What’s the difference between that and Wall Street analysts putting out research reports that push stocks of companies their firms have relationships with?
The millennials’ overt communication of rationales and strategies isn’t so different from the more covert way hedge fund managers signal their trades to each other and get uninvolved parties to leak to the media. It doesn’t take a rocket scientist to figure out how the Wall Street Journal gets all the stories about upcoming IPOs first.
Yeah, there’s more to this than a battle over investment profits.
I talked with a handful of millennials, business owners and an MBA with Robinhood accounts. They’ve had different investment experiences — one round-tripped Koss and AMC, coming out even; another stuck with her core ADT, Moderna and Pfizer holdings.
But all of them share the feeling that Wall Street is organized to make the wealthy wealthier — which is exactly what’s been happening for several decades. They laugh at their baby boomer parents who scratch their heads wondering why their feckless offspring are in the basement trading stocks on Robinhood. That’s what happens when you’re left with the crumbs.
The Koss family, which invented the stereo headphone in 1958 and controls about 70% of Koss Corp.’s shares — has a stake that’s now worth about $333 million.
Who would have thought the value of that stake might depend upon a horde of disgruntled millennials who are just beginning to understand Wall Street?
Kathleen Gallagher was a business reporter at the Milwaukee Journal Sentinel and the Milwaukee Sentinel for 23 years. She was one of two reporters on the team that won a 2011 Pulitzer Prize for the One in a Billion series. Gallagher is now executive director of 5 Lakes Institute, a nonprofit working to grow the Great Lakes region’s high technology entrepreneurial economy and culture. She can be reached at Kathleen@5lakesinstitute.org.