This short-squeeze is the ‘grand awakening:’ Capital Wealth Management

Yahoo Finance’s Alexis Christoforous and Kevin Simpson of Capital Wealth Management discuss the short-squeeze frenzy.

Video Transcript

ALEXIS CHRISTOFOROUS: I want to stick with the markets now and bring in our next guest, Kevin Simpson with Capital Wealth Management. Kevin, good to see you. We see the stock market is selling off today. It could wind up being the market's worst day of 2021. And at the same time, we're seeing those speculative trades in a handful of stocks, including GameStop and AMC, move higher.

What do you make of the phenomenon that we're seeing here? I mean, short-squeeze is nothing new on Wall Street. But what do you make of this phenomenon we've been seeing this week?

KEVIN SIMPSON: Yeah, well, it's a great week to have me on, because there's a lot to talk about. And certainly we've seen short-squeezes in the past, but I call this one the grand awakening. The best thing that we can come from this is the education that hopefully so many people will come to appreciate.

You know, seeing this mass chat room chatter do something that we've never seen before is a little bit reminiscent of the Yahoo chat boards from the 1990s. But this is something totally different. And I know that unfortunately, there's going to be some people that will lose money as a result of this trade. But even us as professionals, as good as we try to be, there are occasions when we make trades that go against us. And I'm just very, very enthusiastic and optimistic that we'll have lots of additional traders and a lot more transparency into this market. But what a week, huh, Alexis?

ALEXIS CHRISTOFOROUS: What a week is right. We're still trying to wrap our heads around it, and it may not be over yet. I mean, we know that we have hearings coming from Capitol Hill regarding the frenzied trading that we've been seeing. And earlier, we actually had Robinhood's CEO on, Vlad Tenev. And one of the questions that we asked him was whether or not he was prepared to testify before lawmakers, and he said he believes his platform is doing the right thing. Take a listen to what he had to say.

VLADIMIR TENEV: Everyone at Robinhood operates this company with integrity, and first and foremost, looking out for our customers, the individual investors, and their best interests. Of course, we are constantly in communication with our regulators and with lawmakers, and we continue to do so. And, you know, I look forward to having conversations with anyone about this, because I think, obviously, it's highly technical and involves settlement mechanics, as you guys saw in some of your other conversations. And I think Robinhood made the right decision here.

ALEXIS CHRISTOFOROUS: Now, Kevin, I know you're not a legal expert, but you're in the markets. This is what you do for a living. You hear that. How does Robinhood, you think, have investors' best interests at heart when they're telling them how they can trade particular stocks? I mean, basically they said you can only-- for a short time there-- they said you can only sell GameStop, which, to my mind, makes me think they're looking to go and protect the hedge fund billionaires who have been shorting the stock and make money when it drops.

KEVIN SIMPSON: Yes, it certainly seems a little hypocritical when you listen to it from his perspective. It's still a new platform. I think it's a platform that's engaging lots of new investors, both of which are learning as they go. I think the regulation that can come from this will only be more healthy to make sure it doesn't happen again in the future.

I think, with Robinhood specifically, it was a liquidity issue for them as a firm, maybe not something that he was doing proactively to help the hedge funds or the larger traders. You know, certainly the Reddit crowd has identified them and is doing a yeoman's job in keeping these prices higher. But from Robinhood's perspective, you know, it's not a free platform. They pay for trades. There's order flow dollars that certainly go back and forth in a big, big way.

But the regulation shouldn't just stop at the traders. The regulation shouldn't just stop at the chat boards. I think the regulations also need to look and shed a light on short selling, because when you can short more shares than exist in a float, then I think you have a real problem there. And having some of these regulators look at how short selling works or doesn't work, I think, can also become a very, very good outcome as a result of any future legislation.

ALEXIS CHRISTOFOROUS: Do you think we might see rule changes regarding how much an individual investor can buy on margin? Do you think that that would be a helpful way to sort of put a cap on this going forward?

KEVIN SIMPSON: Yeah, absolutely, and we've seen that before. I mean, even in the 1929 crash, you were able to margin 90% of your portfolio. Here, you know, it's been a little bit more along the lines of 50%.

But I think margin is something that should be regulated, you know, from an investment standpoint. I don't think that's taking away any of our rights. We can invest everything that we have, and we should be able to do so. But margin requirements should be governed, in my opinion, and I think they will be.

ALEXIS CHRISTOFOROUS: You brought up liquidity with Robinhood. That's a good question, and I think a lot of traders are very concerned about it. I mean, they had to draw down their credit line. They had to raise a billion dollars overnight. If you were a trader trading on that platform right now, would you be inclined to move your money off of Robinhood?

KEVIN SIMPSON: Well, we're not traders on Robinhood, so I certainly wouldn't want to comment or say anything negative about them, because I think that there's so much good that's being done by education for younger investors. I know my son's in high school, and he's been talking about GameStop for the past three days. So I think anything that gets people excited and involved, wanting to learn more about the markets, is a positive.

As far as order flow, even yesterday when they were down for purchases of some of those names, there's other platforms that traders could have gone to-- you know, Schwab, Interactive, Fidelity, E-Trade-- I'm certain that they were available for execution all day long. So I think the educational concept that Robinhood is supporting is something that I would support. And not trading there for institutional purposes is probably somewhat obvious, but I'm rooting for them.

ALEXIS CHRISTOFOROUS: All right, we're going to leave it there, leaving it on an optimistic note, Kevin Simpson of Capital Wealth Management. Thanks so much for joining us today.

KEVIN SIMPSON: Thanks for having me, Alexis.