Reddit user explains short-seller squeeze inception

Louis Rossmann, Reddit’s WallStreetBets user, joins the Yahoo Finance Live panel to discuss the latest in the GameStop saga as the stock falls and Robinhood halts trading on the stock.

Video Transcript

- To discuss where all this came from-- of course, we've been covering how it came from Reddit's forum WallStreetBets-- want to bring on a member of that forum to chat about this now. Louis Rossmann joins us on the show. Louis, thanks for coming on here, man.

I know that you were kind of watching what was playing out in WallStreetBets for quite some time. The last couple days, you joined as a formal member. Talk to me about what it was like to see this theory in GameStop play out and what made you want to jump in and play along as well.

LOUIS ROSSMANN: The first few things I want to make clear is that I am a member, but no one individual member or group represents it. It's a group of, over this point, over 4 million people. So I'm just a person that clicked the Join button.

When I started reading the actual due diligence on it is when I realized why they were buying in, which was that there is over 120% of these shares shorted, which means that, at some point, the hedge funds that made this very risky bet are going to have to jump in. And rather than short it this much to where they could cover at a reasonable price, they shorted more than the actual available shares, which would mean that they would then have to cover.

And I was-- honestly, I didn't actually read the whole due diligence. I just saw people buying GameStop in the beginning. And I thought, this is an obsolete retailer. And then it went from 4 to 14. And I said, OK, whatever. It went to 20 to 30 the 40. And then once it hit 40, that's when I actually started reading the due diligence section. Because that is-- they do have a due diligence section that is very separated from the part where people post things in a humorous fashion.

And there is sometimes some fairly good stuff there. And that's when I realized, now I see what you're doing. This is not a meme anymore. There's actual fundamentals behind the reason that you are doing this. And at some point, I said, once it got to 104, I said, fine. I will put in like less than 1% of my portfolio so that if it goes to zero, I won't care. But if it does continue to go up, I can say I was part of this moment in history.

- Louis, you've probably heard, there's a lot of debate that's happening right now about what this all means, what the motivation is behind some of these traders. And to your point, you're right. There are millions of traders that are on this forum. Everybody doesn't speak with the same voice. But how much of this do you think is really about sending a message to the institution? How much of it is really just about being able to play the same game and make money the same way?

LOUIS ROSSMANN: A big part of it was being able to play the game and make money the same way. And again, I'm just purely interpreting what I think other people are doing. I do not speak for them. But a lot of people were put out of work by the pandemic over the past year. You combine that with a lot of people that are not able to work or not able to make a living, don't have a job, and there's going to be more interest in people getting into investing as a way to make money.

They have eight hours free a day that they didn't before. So a lot of people now have time to sit there all day and read up on these things. And all of this information that they used to make this stock trade was public.

The amount of shares that were short, this is all publicly available information that, now that you have eight hours a day that you didn't have before where you can just sit there and read through this stuff, a lot of people are finding that information. So they're just deciding, OK, why don't we make trades based on this information? And they did, and they made money at it.

The point at which it started to become a real middle finger to the establishment, I believe it was when the finan-- when the press started covering it/them in a negative manner, when brokerages decided-- that have ownership in the companies that shorted the stock, by the way-- decided, we're going to stop trading on GME. We're not going to allow you to buy anymore because it's in our financial best interest that you not be able to do that.

That's when it started to become a full-blown war, in a sense, I think, between people who are incredibly, incredibly aggravated at a financial sector that appears to always win while normal people lose. There's a lot of aggravation over what happened in 2007 and 2008. There's a lot of underlying resentment for these things that have not necessarily been addressed. And what they're doing is, this is a way to beat them at their own game using their own greed against them. That is what's happening. And I think that's a big part of the motivation.

- And to your point too, I mean, we're talking about things that were publicly out there. And these are things that anyone can look up and trade on. But specifically, I think the thing that's new here is you're grouping together a bunch of people who might not have a lot of capital to work with-- who knows what the individual players are-- but might not have a lot here to team up and take on some very big institutions.

On the front of the anger you're addressing though, when you look at that-- I'm looking at WallStreetBets right now, a lot of chatter about this new lawsuit filed against Robinhood. And there are, I assume, a lot of people who may point to the fact that once we saw that announcement of trading getting-- you know, not allowed to buy shares in these companies, that kind of triggered the negative price moves we saw. What's the sentiment you're hearing among traders in the forum now about that anger now targeted towards those brokerages?

LOUIS ROSSMANN: That's market manipulation. That is at best immoral, at worst illegal. The SEC should investigate it entirely. So they are claiming that when normal, average, everyday people decide that they are going to look up research on how a stock is shorted and then purchase that stock at retail price that that is market manipulation. But when a company that has a financial interest in a firm that is shorting the stock says, we're not going to allow you to buy it anymore, that's not market manipulation?

That's where the anger is coming from. And I think it is righteous anger at people who are skirting the rules in a way that we would not be able to skirt the rules. Would trading be halted on a stock because I was losing money? Would Agile Therapeutics get halted on December 22, 2017, because the FDA issued a CRL I didn't think was coming? No, that doesn't happen. But it happens when they make risky trades.

And I think that there are a lot of people that are aggravated at people who make these risky trades, who do things they're not supposed to and not being held accountable, and this is an important moment because we're going to find out who is held accountable and who is to blame. And a big part of why I've been making the videos I've been making is because I saw it start to tip to the point where normal, old media outlets were blaming the kids who caught the adults breaking the law rather than the adults that were breaking the law.

- Yeah, I want to be very clear to you because that was not what we were doing here at Yahoo Finance, for viewers who might be tuning in to hear what you're talking about here with us today.

LOUIS ROSSMANN: And I appreciate that very much.

- We weren't doing that.

LOUIS ROSSMANN: I appreciate that.

- And I was kind of blown away by the technical analysis shown there in the Reddit thread because it was very deep, and we saw our charts featured in those videos as well, which made us happy. But when you think about maybe where we go from here, obviously, as you said, you didn't throw a lot of money into this, but you did see it run up. You jumped in. You want to be part of a movement.

I wonder how many people join you in that feeling here as we see GameStop now at 263, whether or not they're going to be holding, whether or not they might say, look, I don't care about profiting anymore. Now it's more about sending that message you're talking about.

LOUIS ROSSMANN: Well, what's very interesting is that it is currently holding the price that it is holding in spite of the fact that people are literally not able to buy in. So the whole concept of supply and demand is that when demand goes up and supply is down, price goes up. But when demand goes down and supply is the same that the price is then going to go down.

So you have demand that has been artificially decreased by brokerages that have decided and that may wind up being illegal to not allow you to purchase the stock. And in spite of that, this is holding over $200, which I think is absolutely insane. When I read that they were not going to allow people to purchase this stock, that you could not purchase even if you wanted to, I was looking at that thinking, ah, this is going to go down to $10. The fact that it's holding over 200 is a real sign of solidarity between the people that just want to see the individuals that made-- took this corrupt action burn.

- Louis, you said that the anger against the establishment stems all the way back to the financial crisis. And you could argue, at the time, there was a lot of anger directed at the institution largely because individual investors, individual homeowners were the ones that were sort of left with the bag. And the argument this time around has been-- you've heard it from the institutional investors who say, look, these individuals should be warned about the risk. They don't know enough about the risk going in.

And how much of that do you think should be a part of the discussion? Should the regulation be able to-- regulators be able to step in and say, there needs to be more protection for the individual. I'm curious how you see that conversation playing out given that that's been the large argument on the institutional side.

LOUIS ROSSMANN: Well, there is the argument that I've heard that apps like Robinhood try to glorify trading. You know, you'll have the little confetti and things fall down at the end of the screen when you make a trade and that they make it a little bit too easy to get into trading stock. And I understand that argument.

But at the same time, I don't think that your average person is saying, you know what? I wasn't going to put $100,000 into a penny stock. But since I saw confetti falling on my screen, I'm going to do it. I think that we need to have-- really, I mean, that is the argument that usually-- that's the same kind of argument as, well, you know, you can't let your kid play "Street Fighter" because he's then going to try to use it on kids at school kind of thing.

And I think that there does need to be a certain level of education involved here regarding someone that you-- maybe someone that you speak to or something. But at the end of the day, if someone wants to make these trades, if someone wants to put $100,000 into a penny stock, they're not going to not do that because you give them a EULA. They're not going to not do that because you put something in front of them.

And the real question that needs to be asked is, what freedom are we willing to limit in the name of this? Because what I would say is, if you really want the market to be more stable, limit the freedom of the individuals that shorted a stock to over 120% of the available shares.

- Yeah.

LOUIS ROSSMANN: Because I'm fairly certain-- I'm not a lawyer. I'm not a financial services professional-- but that type of naked short selling is illegal. Use the laws on the books, and enforce the laws that are currently on the books, and stop this from happening rather than create new laws.

- Yep.

LOUIS ROSSMANN: Because the whole reason that retail traders are jumping in is because someone else did something illegal, and they want to catch them on it.

- Yeah. And no question, the conversation is about regulation on both sides of the trade. Louis Rossmann, it's great to get your perspective today, Reddit's WallStreetBets user. Thanks so much for joining us.

LOUIS ROSSMANN: Thanks so much for having me and spelling my name with two Ns. You have a nice day.

- We make sure to get it right.