Social investing rocked Wall Street. Now, fintechs are seizing an opportunity.

This story is part of "The rise of retail investing," a Protocol special report. Read more here .

Surging trading volume, gyrating meme stocks and growing unease over whether investors are being taken advantage of: These are unmistakable signs of how social networks and commission-free trading have collided to transform Wall Street.

The GameStop frenzy made it clear to everyone that just one rollicking Reddit thread is all it takes to make or break a stock. It's far less clear what to do about it.

Confronted with the rise in social investing, people are playing true to form. Technologists are looking to tap into the power of online communities. Regulators are contemplating how to rein in excesses. And hedge funds are playing every angle.

The debate also shows all the ways to view the stock market: It's sports for nerds. It's a legal form of gambling. It's a vehicle for savings. How you think of social investing is likely to be colored by whether you see stock trading generally as a means of entertainment or enrichment.

How trading got social

Online chatter about stocks isn't new. Listservs and Usenet groups served up stock tips in the pre-web era. Yahoo Finance's message boards defined the dot-com bubble. Even WallStreetBets, the Reddit forum that helped send shares of GameStop and AMC soaring, dates back to 2012.

Fee-free trading isn't novel either. Robinhood's no-commission trading app debuted in 2014, and most of the big online brokerages matched its zero-fee trades in 2019.

Sometimes trends need the right moment to coalesce; the coronavirus pandemic seemed to have provided it. The market's crash and swift recovery, as well as lockdowns that left many with time on their hands, sent trading volume soaring. It rose more than 60% in 2020 and another 32% in the first quarter.

Some of that was in meme stocks — beaten-down companies that online chatterers deemed overlooked or just amusing. The WallStreetBets Reddit group and tweets of some prominent investors like Chamath Palihapitiya fueled a trading mania that squeezed short-sellers.

"Social media sparked the fire," WallStreetBets founder Jaime Rogozinski told Protocol, adding that the episode that sent GameStop shares up to $483 was "a refreshing start to a wonderful conversation" about how retail traders "fit into the larger equation."

Why online community pays

For online brokerages, the surge in trading has meant a flood of new customers. Some see social networks as a way of attracting new users or retaining them once they've opened an account.

Robinhood hasn't added many social tools. It hasn't needed to: People have set up Facebook groups on their own to connect with fellow app users. The app does have one powerful social incentive: People who sign up a friend get a free share of stock. In a variable payout reminiscent of a slot machine, that share might be worth anywhere from $3 to $225.

Robinhood only recently toned down in-app features that celebrated trading and other actions with virtual confetti. Vocal anger over the temporary restrictions Robinhood placed on trading meme stocks — put in place because of sudden capital demands by its clearinghouse, which viewed the rapid-fire trades as risky — don't seem to have meaningfully slowed down new signups.

Regulators and politicians are scrutinizing how apps such as Robinhood incentivize trading via gamification. Robinhood, which said last month it had submitted confidential filings for a public offering, declined to comment.

Other startups are looking to capture some of Robinhood's social buzz. Public, a rival online brokerage, even hired singer Michael Bolton, now strangely beloved among meme-slingers, to urge disaffected Robinhood users and others to "break up" with their current trading app. It's also adding features to help retail investors learn from others' trades, as are Commonstock and SoFi. Public and SoFi also offer incentives for referring new customers, like Robinhood.

Many of those signing up are young and new to trading. Charlie Liu, an 18-year-old Yale student and rookie investor, said he invested a token amount in GameStop stock "as a symbolic gesture of support." He later sold his shares.

Viviana Vazquez, 25, is a Robinhood refugee. She said she canceled her account to protest how it handled GameStop trades. The app, she said, made it too easy to "blindly follow the crowd." She switched to Public.

It's not clear if social features will make app traders more loyal or deliver them better returns. A 2019 study found that social features in Venmo and WeChat Pay helped those payment apps win users in their early days. But the authors also noted that "most attempts to integrate social links into financial payments have met limited success."

Wary of the free-for-all on Reddit and Facebook, some investing apps are building their own community features.

Public gives users access to a social feed where investors can share their trades and holdings. (Bolton has a portfolio that's almost as bland as his musical oeuvre.) The online brokerage says this provides more information for investors than they would get on social media.

In October, SoFi introduced features to help customers "discover new investment ideas" from other users and compare their portfolio's performance, CEO Anthony Noto said in a blog post.

Commonstock, a purely social investing app, lets people connect their brokerage accounts to show other users what investments they actually make. (Dollar figures aren't shown, but percentages are.) Users can follow others and discuss why they make trades. Commonstock is a "community for knowledge," not a brokerage, so it doesn't do things to incentivize active trading, said founder David McDonough. The brokerage links just serve to "validate signal," he said.

"I knew self-directed investing was going to be massive," McDonough said. The GameStop incident underlined this, he said: "The world woke up to the sheer force of self-directed investors. GameStop became this flashpoint when retail was able to say, 'We are a market force and we are capable of being heard, and you can't ignore us anymore and tell us what we can and can't do.'"

Public and Commonstock said they saw a spike in visitors and new users as a result of the GameStop frenzy. Who could blame them? It seemed like everyone was having a great time.

Not all fun and games

For many, GameStop highlighted retail investors' newfound collective power, orchestrated through social media. But regulators and academics are concerned. The wave of stock-market newbies are ripe for manipulation by more sophisticated market actors, some warn.

Some retail investors lost big when GameStop shares crashed. "The Robinhood-GameStop situation is a real warning sign of the potential risks in the investment world," said Santa Clara University law professor Stephen Diamond.

Rogozinski of WallStreetBets dismissed this line of thinking. Many new investors, he argued, understand the risks they are taking. In fact, he said, they are knowingly taking on a system long portrayed as a complicated world that only Wall Street professionals understand.

"These younger individuals, they're saying, 'Damn right it's a casino, and we're gonna go ahead and have fun with it,'" he said. "We just want to see whether the thing is going to go up or down, and think that we can find weaknesses in the system and try to exploit it."

That worries Diamond. He's studied how online communication has changed the stock market. Even "relatively clumsy listservs" caused trouble in the 1990s, and today's social tools are "far richer," he said.

"People have a tendency to form opinions about buying or selling stocks and bonds quickly, without sufficient information," he said. "People are trying to exploit that in these kinds of bubble-like atmosphere."

He cited the recent case of a California trader who was accused of using Twitter to spread false and misleading information about a stock, causing its price to soar more than 4,000%. In its complaint, the SEC claimed he had garnered almost a million dollars in trading profits from the alleged fraud.

Vazquez, the investor who switched trading apps, said some Robinhood members would go on Facebook groups and "post information that wasn't really accurate and a lot of people just go by that,."

Bill Pearce, chief marketing officer of University of California, Berkeley's Haas School of Business, said he worries about "immature investors" who could lose their savings while thinking they're "sticking it to Wall Street."

Hedge funds, he said, look at the online conversations, and say, "We're gonna take these guys for a ride." He added: "And they did."

Educating traders

Not everyone's treating trading as a game. Even if buzz from friends is how new traders get hooked on trading, once they're in an investing app, every swipe is a teachable moment.

The need is growing. A 2017 Gallup study found that stock ownership fell in all groups except the oldest and richest Americans after the 2008 financial crisis. The sharpest drop was among those ages 18 to 29, where stock ownership fell from 42% between 2001 and 2008 to 31% between 2009 and 2017.

Public COO Stephen Sikes said many young investors saw the impact of the crisis and accompanying recession on their families and went on to grapple with huge student loans. It's only recently that they've started to begin testing the waters as retail investors.

"What we've seen is new investors do improve over time, almost naturally, by doing," he said.

Public's community guidelines ban "any activity that could be considered an attempt to pump a stock or manipulate the markets." Still, Sikes acknowledged that there is always the risk of a herd mentality causing less experienced investors to make bad decisions. "We acknowledge that risk, and are intentional in building a community that self-polices some of that," he said.

Diamond of Santa Clara University said an online community that offers "some kind of tiered, curated system that improves the quality of information that people have is a reasonable approach."

It's equally important to have detailed information about the dynamics of investing, he stressed. He cited the case of a Robinhood trader who ended up with an $800,000 tax bill because he wasn't aware of an IRS rule about rapid-fire trading.

Robert Cortright, CEO and founder of DriveWealth, which provides back-end trading services for apps like Cash App, Digit and Aghaz, said it's important to help customers learn the basics about investing. "This is good for people," he told Protocol. They shouldn't wait until they're 40 and starting to earn more to figure out the market, he added.

That's the view of Liu, the college student who started trading on Public shortly after he turned 18. "Up until then, I knew the stock market existed but I never really had an interest in it," he said. "I think investing is a great tool to know in terms of life skills."

But Rogozinski argues Wall Street has long been a flawed, elitist system that doesn't really promote diligent wealth-building. Given that, why not have some fun exploiting the system?

"The kids are not trying to be Warren Buffett," he said. "They're not doing anything wrong. They don't care about the 'right information.'"