Armed with sharemarket trading apps such as Robinhood, “youth” traders used popular online discussion forum Reddit to hatch their plans to push the share price of GameStop up 1500 per cent in January, turning a company that was worth less than $US290 million ($382 million) a year ago into a $US24 billion-valued business, albeit briefly.

The buzz was short-lived – GameStop’s shares have since fallen back to $US53 from a high of $US483. But its clear the rebel traders won’t be going away quietly.

The Reddit army has since turned its focus to other targets, albeit with varying success. A push to pump the price of silver to squeeze investment banks unwound spectacularly this week, burning many retail investors.

Bennett was in on the silver rush, but didn’t make a buck. “I almost got out at break-even but panic-sold and lost a bit – I learned my lesson there.“

Still, Bennett is no wide-eyed innocent and knows it’s not all higher ideals driving his and other people’s trading strategies.

Successful day traders don’t just trade to make a political point, he says, they also bank on the FOMO (fear of missing out) of other traders, so there are willing buyers for their overinflated shares. As the old saying goes, someone has to be left holding the bag.

He’s also aware that not everyone in the Reddit army is on the same side, or is who they appear to be online.

“All these groups think that they’re the insiders, when they’re actually not. They’re the ones being played at this insane game. It’s like a meta pump and dump. Like an Inception pump and dump”

Day trader Will Bennett

Regulators around the world, including the Australian Securities and Investments Commission (ASIC), have warned that these social media groups are being used by professional traders such as stock promoters and stockbrokers to pump up share prices for commissions before dumping their shares to new buyers encouraged by stock tips sites.

Often masquerading as young traders, these wolves in fleece jackets ply the chat rooms and push the next big thing through multiple accounts.

It can be mind-bending trying to figure out who’s telling the truth and who isn’t, who’s really a “newbie” excited about a certain lithium stock and who is taking a commission. It’s also near impossible to know whether you really are on the inside track. Bennett says often behind these public groups are private Telegram messenger groups or smaller Facebook groups where plans are hatched to pump other retail shareholders.

“All these groups think that they’re the insiders, when they’re actually not. They’re the ones being played at this insane game. It’s like a meta pump and dump. Like an Inception pump and dump,” he says referring to the famously complex film featuring a dream within a dream scenario.

“I would suspect a lot of insider trading is going on as well,” he says.

This week, one of the key “leaders” of the Reddit retail shareholder insurgency was revealed by The New York Times to be a registered broker moonlighting under the user name Roaring Kitty.

Short sellers have told The Age and The Sydney Morning Herald they have set up bots to trawl these groups for trading trends.

Shareholder data for GameStop suggested that the majority of the stock continued to be held by institutional investors and insiders such as company directors and executives. Some estimates have put the gains recorded by these investors off the back of the retail frenzy at as much as $US16 billion ($21 billion).

As this masthead’s columnist Stephen Bartholomeusz wrote this week: It doesn’t seem to have registered with those who were seduced into seeing the GameStop short squeeze as a populist protest with moral dimensions – a supposed new Occupy Wall Street–style protest against inequality – that among GameStop’s shareholders are some of Wall Street’s most powerful and sophisticated institutions and wealthy individuals.

It also took a long time for the Robinhood army to realise that the free trading platform they use made money by onselling their data to the same hedge funds they were fighting. Or to understand that their trading frenzy caused serious financial stress to the trading app platform they loved so much.

A recent report by IOSCO – the international body of corporate and market regulators – warned there were increasing risks caused by the retail shareholder frenzy sparked by COVID-19. “The increase in online general share trading and the surge of retail investor interest in the sharemarket during periods of lockdown has been notable,” the report said.

“COVID-19 events show some areas of increased opportunities for bad actors’ retail misconduct and potential investor harm,” it warned.

Interestingly, IOSCO’s report – produced by its Retail Market Conduct Task Force, co-chaired by ASIC and the Central Bank of Ireland – pointed out that the same remote working arrangements that had, in part, fuelled the retail investor boom were also causing significant risk to regulators.

“In various jurisdictions, remote working has affected risk management arrangements in firms (e.g, internal surveillance procedures to monitor staff conduct as well as operational, cyber and outsourcing risks), and consequently regulators’ supervision and surveillance functions.”

In other words, before COVID professional traders knew their every move was being monitored, including their phone messages and calls. But as more finance professionals work from home, they are going rogue to pump up their own sales commissions.

Former ASIC commissioner Pamela Hanrahan said the IOSCO report offered fascinating insights into how remote work is impacting markets. “They’re sitting there going, gosh, we can’t ignore the fact that we have everybody working remotely, including our own regulatory staff, that that creates a level of risk that we need to think about. And I think that’s absolutely right.”

However, she says poor conduct by professional brokers using apps and other means to rig markets is not new.

“There’s always been a lot of spillage around financial markets. I’ve spent enough time listening to tapes of recording telephones and dealing rooms and looking at WhatsApp chats in cases where you were looking at market manipulation, and [it’s] absolutely extraordinary what people want to say.

“I’m always completely shocked that people say extraordinary things on the record.”

Hanrahan, who is now Professor of Commercial Law and Regulation at UNSW and ANU, says the new trading habits raise fresh challenges for how regulators investigate market manipulation.

“We have to work out how to make these market manipulation laws work in an environment where there’s lots of people who talk about their intentions or predictions about markets, but also when there’s a hell of a lot of people who rely on that advice, or that information,” she says.

Along with the risk of bad actors, this trend has caused systemic risks that could cause detriment to the overall markets and retail investors, particularly given the stress caused to Robinhood and the hedge funds that were squeezed. (Robinhood sparked outrage during the GameStop frenzy when it decided to only allow its members to sell the shares for a short period of time, allowing the hedge funds to close out their shorts.)

From his office in Paris at the OECD headquarters on Rue Andrew Pascal, former ASIC commissioner Greg Medcraft told The Age and The Sydney Morning Herald this week the organisation is examining policies to curb risky trading behaviour following the extraordinary surge in GameStop shares.

Medcraft, who is now the director of the OECD’s markets and conduct arm, pointed to possible policy responses including faster settlement of share trades, forcing hedge funds to disclose their short bets and even a tax on financial transactions as regulators move to ensure markets function properly.

“The issue for market regulators will be as always ensuring markets are fair, orderly and transparent and investors have trust and confidence in them,” he says.

It’s a noble purpose. But in the meantime, what are ordinary investors – those with long-term, more traditional investment strategies and limited social media presence – to make of the situation?

Todd Hoare, head of equities at Crestone Wealth (born out of UBS’s private wealth business), says ordinary investors should be “alert but not alarmed”.

Hoare says the squeeze has caused a flurry of share sales as investment houses look to sell good assets to cover the losses they suffer in short positions, while other institutional investors are choosing to sit on the sidelines given the increased risk.

But Hoare says the current environment is ripe for creating “alpha” – the ability for a sophisticated investor to beat the market.

“I think the important thing to notice is that there is a distinction between fundamental long-term investing and momentum, which is what we saw with Reddit,” he said.

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“At the end of the day, those large long-term investors should actually really welcome the type of disconnect that we’ve seen over the past few weeks. Because those fundamental disciplines of investing, and what some people are prepared to pay for that investment, that disconnect creates the ability to make money, it creates alpha.”

For Will Bennett and other young traders, the revolution will continue, and it will involve skirmishes with the big investment houses, but it might not be a full coup.

But Bennett knows that true value doesn’t come from a Reddit thread of a Facebook post. “I’ve realised the trades I’ve made the most money off are the trades that I actually found myself and didn’t get from the tips pages.

“It’s one of the things, that by the time it gets to a tips page it’s too late.”