Volatility expert Christopher Cole warns that Wall Street needs to wake up to social media 'weaponization' after GameStop frenzy

  • Christopher Cole runs Artemis Capital, a volatility-focused hedge-fund manager based in Austin.
  • He walked Insider through his biggest takeaways from the GameStop-fueled market frenzy at the end of January.
  • He believes Wall Street is underestimating the power of social media. 
  • Visit the Business section of Insider for more stories.

GameStop’s slogan — “Power to the Players”  seems oddly prescient now. 

The brick-and-mortar video-game retailer’s stock was the center of a market frenzy that many on one side — the Reddit-driven retail traders —  treated as a game, despite the billions of dollars-worth of chaos the volatility created. 

The power of social media hadn’t yet been trained on the markets before, at least not on a few targets like that, and the effects have been widespread. Melvin Capital, the hedge fund at the center of it, was forced to turn to Ken Griffin and Steve Cohen for billions to stay afloat.

Robinhood, the online trading platform many of the Wall Street Bets crowd used, tapped its existing investors’ billions as well, and everyone from Ja Rule to Ted Cruz weighed in when the brokerage restricted trading in the targeted stocks. Market volatility caused by the trading has some investors like Maverick Capital founder Lee Ainslie excited for opportunities while others, like Two Sigma and D1 Capital, are trying to rebound. 

To Christopher Cole though, the biggest and most important effect from the frenzy still hasn’t hit Wall Street’s establishment yet.

Artemis Capital founder Christopher Cole considers volatility “an instrument of truth”Global Volatility Summit

While managers are tracking forums like Wall Street Bets closer than ever before, the titans of finance are “in denial about the weaponization of social media to disrupt capitalism,” said Cole, who runs Austin-based Artemis Capital, a volatility-focused hedge-fund manager. Cole, with nearly 50,000 Twitter followers, is known for his unique views on the markets and volatility, and made more than 15% in the firm’s flagship Vega fund last year, which runs just under $200 million. 

In an interview with Insider, Cole explained that the surprise Wall Street felt last month was similar to how the political establishment reacted in 2016 as Donald Trump’s dedicated and ravenous social media following led to his election as president.

“There’s nothing new about a short squeeze, what makes this different is that this is the first time we’ve seen social media weaponized for real economic purposes,” Cole said. 

“The environment resembles the dot-com era” except instead of “doctors and dentists on Yahoo message boards,” it’s smaller investors on with stimulus checks following advice on Reddit, he said. 

“Platforms like Robinhood have gamified markets. They claim to democratize investing, but what they have done is democratize speculation, almost like online poker,” Cole said. 

What is underneath all of this is the Federal Reserve, which has consistently lowered interest rates at the first sign of volatility in the corporate debt markets. The central bank’s actions, Cole said, has suppressed volatility to detriment of fundamentals, something billionaire investor Seth Klarman has complained about in letters to investors before. 

See more: Billionaire Seth Klarman’s Baupost returned less than 5% in 2020, failing to break double-digits returns in what’s been called the best year for hedge funds since 2009

“Flows matter more than fundamentals — understanding the reflexivity of such flows is all that matters right now,” Cole said.  “I think it will break eventually.” The whole system needs “a reset,” either through deflation or, more likely, stagflation.

In meantime, the volatility that caused some of the most well-regarded investors in the industry to lose billions in January isn’t going away. Cole said the heavy volume of call options causes volatility to increase alongside the market, which is the opposite of the typical relationship. 

The call-to-put ratio for US stocks is at the highest level since the dot-com bubble, he said, which is “truly an interesting phenomenon, and commands attention.”

“You could absolutely see crowding into the wrong security bring down parts of the market,” he said. 

“Think of the options market as highly combustible material. It doesn’t mean a fire will break out, but it can amplify a flame.”

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