How 'democratizing investing' has paved the way for the meme stock moment, according to a fintech CEO

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  • The CEO of DriveWealth, a fintech that powers apps like apps like Revolut, described what he makes of the frenzied retail trading moment.
  • Bob Cortright said the extraordinary activity is an outgrowth of years of opening up trading to the masses.
  • While he views that positively, there has been less education than new traders need.
  • Visit Business Insider’s homepage for more stories.

The chief executive of a financial-technology startup that builds the piping to power brokerage and investing apps like MoneyLion, Revolut, and Cash App’s investing feature, said he views the extraordinarily volatile trading activity in stocks like GameStop this week as an outgrowth of opening up trading to the masses. 

That’s for better or worse. Bob Cortright, who founded and runs the Chatham, New Jersey-based DriveWealth, said in an interview with Insider that retail traders entering the stock market with little or no barrier — the foundation of his business and the concept of “democratizing” finance, the industry’s favorite buzzword — surely is a good thing.

But a lack of education around trading sophisticated measures like options has in part led to frenzied trading activity that slammed old-school and startup brokerages alike this week, he said. 

“This is almost like the culmination of democratizing investing, or I think the idea behind democratizing investing,” Cortright said by phone on Thursday. “I think now it’s taken a different flavor just in the short term, the way people are amassing each other together to disrupt the shorts, or whatever it is — and that’s a free market.”

“This is new. This is new to the old guard and the insiders who have had their way for a long time,” before armies of day traders gathered online to target stocks and when the cost of placing a single trade from home was high, he said.

Just over a year ago, major brokerages scrambled to cut trading commissions after years of mounting competition for a new generation of investors who have flocked to Robinhood, which has long marketed its no-fee service as “democratizing” investing, and its competitors. 

Read more: How hedge funds are tracking Reddit posts to protect their portfolios after the Wall Street Bets crowd helped tank Melvin Capital’s short positions

The market volatility that has captivated investors this week has at once pummeled some hedge funds, rewarded some small-time investors who have jumped into the market to buy up soaring stocks at the behest of Reddit users, and turned out to be highly lucrative for big-money investors like the private equity firm Silver Lake

Cortright has a unique vantage point. DriveWealth effectively builds the plumbing for some apps to offer stock-trading and investing products, including one of its specialties, fractional shares, and has helped power the rise of easy-to-use personal finance apps. The companies he counts as clients, or “partner” firms, do not offer options trading. 

His firm has raised some $100 million from investors, including a recent round led by returning investor Point72 Ventures, the early-stage venture capital firm funded by billionaire investor Steve Cohen and some employees of the hedge fund he founded, Point72 Asset Management.

Read more: See the 13-page pitch deck that DriveWealth, a fintech that powers trading and investing apps, used to nab $57 million from investors like Point72 Ventures

Now, Point72 Asset Management has booked a 15% loss for the year on the back of the GameStop frenzy, according to a New York Times report on Thursday that cited a person familiar with the matter.

Cortright, who before founding DriveWealth in 2012 worked in capital markets and electronic trading at firms including FX Solutions, said Thursday that market participants were struggling to keep up with intense trading volume.  

“The whole market’s gummed up, in a way. They’re struggling, DTCC is changing margin limits,” he said, referring to the securities mega-clearinghouse the Depository Trust & Clearing Corporation.

The DTCC is hardly a public-facing name. But behind many brokerages’ interfaces and transactions with their clients, the clearinghouse handles a large swath of retail traders’ US transactions. So when the volatility intensified in some securities, the DTCC started raising the amount of money it required to settle those orders.

“The systems are just not capable of handling these types of volumes. Then, you get all the blogs going and the retail traders trying to take revenge on the shorts. Now, you’ve got a perfect storm,” he said.

Read more: Discord bans r/wallstreetbets server over hate speech as the group drives GameStop shares through the roof

A spokesperson for DTCC on Thursday said margin requirements “protect the entire industry against defaults and systemic risk in volatile markets,” citing extreme volatility in GameStop and AMC. 

Now, regulators are stepping in

Cortright said Thursday that he had not personally heard from financial regulators about the volatility. He said once the dust settles on the meme stock saga, he would like to see a closer look taken at who is qualified to trade options.

“I think where the regulators really lacked surveillance was the suitability of the investor to trade options. If you think about it, that was, kind of, the original kind of gambling,” he said. 

Options have been likened to gambling because of the speculative nature of puts and calls, and how inexperienced investors could try and “time” the market. Effectively, traders buy “puts” when they think a stock is going to fall within a certain period of time, and “calls” express a more bullish outlook on a security.

As the abnormal activity dragged into a third day on Friday, with GameStop shares soaring double-digits, the Securities and Exchange Commission said in a statement that it would “closely review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.”

That may serve as an early issue for Gary Gensler, who served as the chair of the Commodity Futures Trading Commission in the wake of the financial crisis and is now set to head the SEC under President Joe Biden. 

Read more: Here’s what lawyers and former regulators say Biden’s pick to lead the transition for bank regulation means for Wall Street

“They’ve made it sound like it’s a whole complex and so difficult. ‘Oh, you need a professional manager. You can’t do it yourself.’ Well, that in the last 10 years has been getting destroyed,” he said, referring to big-money investors. 

“So I think it’s a great time for investors. I think transparency is great. I think AI is going to be fantastic, both for risk management and people building their own customized portfolios for their goals. This is just a little bit of a growing pain, I think, and we’ll work through it,” he said. “I think the regulators have a real task in front of them.”