Jordan Belfort always knew how to push the hot buttons that got regular folks to crave what he was selling—in the old days, as a maestro of penny stocks. The self-proclaimed “The Wolf of Wall Street” (from his 2011 book and the 2013 Martin Scorsese movie of the same name) was a boiler-room impresario. He fleeced small investors out of $200 million, a scam that in 1999 landed him in prison for nearly two years. But Belfort reinvented himself as a motivational speaker and consultant to the likes of car dealerships and vacation rental outfits, and he takes pride in being able to discern the real deal from the crowd-pleasers and con jobs. Who better than Belfort to opine on whether hordes of Gen Xers teaming to buy beaten-down stocks and online brokers selling order flow are good or bad for the little guy?

When I recently received a blast email from a PR firm representing Belfort, offering his "expert opinion" on such issues as "Reddit vs. Robinhood," I leaped at the opportunity to interview the reformed huckster. Does this past master of starting crazes see the Reddit phenomenon as a long-overdue democratization of the stock market, or a frenzy detached from the fundamentals of investing? I also wanted to get his view—as someone who knows how the money is really made in trading—on whether the “zero-commissions” offering that rallied the retail crowd is a boon or a rip-off.

After all, I'd just done a piece on PFOF (payment for order flow) detailing the legacy of another flimflammer, Bernie Madoff. Amazingly, it was Madoff who launched the controversial system that the Reddit revolution brought front and center for regulators and Congress: payment for order flow. The future Ponzi schemer was the first market maker to pay brokers for routing their orders to his firm for processing.

In that story, I relate that Doug Atkin, former CEO of Instinet, the first electronic equity trading platform, got into a screaming match with Madoff in the SEC's Washington, D.C. offices over whether the practice should be allowed or barred. Madoff bellowed, "I'm just trying to get more business!" Why should the SEC stop me from giving brokers the cash they want, he argued. Atkin riposted, "If it's so great for investors, why are your brokers keeping it a secret?" Atkin maintained, and still believes, that the practice bilks small investors and should be outlawed. What does the Wolf think of the edifice crooked Bernie helped build?

Belfort delivered his ideas in the thickest of thick Bronx accents. If Leonardo DiCaprio, his portrayer, had tried to imitate Belfort's patois in the 2013 hit The Wolf of Wall Street, he might have needed subtitles. Belfort now talks less like a flamboyant promoter than a former trader who's seen it all and harbors strong views on how to fix what's gone wrong on Wall Street.

Dangerous for small investors

At Stratton Oakmont, the notorious Long Island boiler room he founded, Belfort and his brokers robbed mom-and-pop clients by orchestrating "pump and dump" schemes. Brokers would tout penny stocks to inflate their value, buying for their own account as prices soared, then foisting the shares on their investors at the peak. That big, sudden "dump" often sent stocks to near zero. Belfort is amazed that the folks joining hands to boost such names as GameStop and AMC on Reddit are turning the practice on its head. "They're collectively pumping up these stocks," he says. "But there's no ‘dump.’ I didn't think it was possible to get that many people to buy a stock effectively together, then keep holding it when the price goes way up. In pump and dump, once investors raise the value, they dump. That's not happening."

Instead, he says, the Reddit crowd eschews the traditional rules of investing—even the regular course of pump and dump. "Their motivations aren't evil, as in old-fashioned manipulation," he says. "They really believe that selling is betraying the cause. And it is a cause. It's ‘story stocks’ on steroids. They have an emotional attachment to GameStop because they remember watching its video games as kids."

The crusade, he says, is both new to Wall Street and anti–Wall Street. "These small investors are seething with anger at mainstream financial institutions and want to get back at them," says Belfort. "They want to show that they have a voice too. It's more about being right than the actual money, because they don't cash out when the stocks go up. Usually, when a stock goes up, people take profits, creating selling pressure. My fear is that the little guy can't hold these stocks up forever." Many of the stocks they're buying, he says, are greatly overvalued. He's mystified by young investors' loyalty to American names that are heavily shorted and, according to Wall Street analysts, harbor the poorest prospects of a comeback.

Bitcoin’s rise

For Belfort, the shock that will send the Reddit crowd's pet stocks tumbling is looming dilution. "If a stock stays up too long, the company keeps printing shares," he says. That gambit can take the form of new offerings or using an overpriced stock to overpay for acquisitions. "If a stock is selling at $400, and its underlying value is $200, the company has a fiduciary responsibility to sell shares and put cash in its coffers," he observes. "You can't pump up a stock forever, and often what sends it down is issuing all those new shares."

America's new infatuation with Bitcoin, Belfort reckons, is partly to blame for the young investors' apparent belief that a mass rush can keep fallen angels elevated for a long time. "People are spoiled by Bitcoin," he says. "Bitcoin has a fixed, finite supply. With stocks, you have an infinite number of shares that can be issued." Bitcoin, he says, is more about "pure supply and demand," free from the distortion of effectively printing more of your own corporate currency. The flagship cryptocurrency doesn't have the equities' problem that high prices tend to bring on more supply, turning the surge into a swoon.

Belfort admits to being a super bear in Bitcoin in the past, and to being wrong. "When it was hitting $19,000 in late 2017, I was on a TV show, and I told the audience that it would crash," he says. "I was right then, but I also thought Bitcoin would go away forever. It was hard to sell and easy to buy, all the things that make for manipulation." His view was that regulators would nix the coins. "Bitcoin looked like the perfect storm for money laundering," he says. "I thought that Bitcoin accounts in Switzerland and the Caymans would be exposed. I thought Bitcoin would initially take hold, then be regulated out of business."

From the start, however, Belfort liked Bitcoin for "its elegant design" as a currency whose value couldn't be eroded by issuing more of it. He now believes it's here to stay since a fatal regulatory onslaught hasn't happened. "Bitcoin now has a much bigger base of buyers than ever before," he says. Its price has plenty of room to run, says Belfort, principally because its fixed supply provides an advantage over stocks: New investors will keep pumping the price, but the rush of new shares that deflates a soaring stock can't happen. He sees the flagship cryptocurrency rising 80% from current levels to $100,000.

Don’t fall for “free” trades

Belfort agrees wholeheartedly with Charlie Munger of Berkshire Hathaway that retail investors get a raw deal from commission-free online brokers that sell their order flow. The practice consists of brokers' getting orders online from retail clients, and handing the trades to giant high-frequency trading houses such as Citadel Securities, Jane Street, and Virtu to execute the trades. Belfort insists that the practice is costing customers a lot more than if they paid commissions, and the brokers themselves paid market makers according to their records in generating the lowest possible trading costs. Instead, he suspects that the brokers are selling their orders to the highest bidders, and that the more a market maker pays them, the higher the hidden cost to the Main Street investors. Only the little guy doesn't see it.

"It's the most expensive 'free trade' you can have," says Belfort. "I saw a a marketing demo from one of the big 'free trades' players advertising how they were 'helping the little guy,' and they're hand in hand with the big guys. It was like a betrayal of trust." He says that market makers pay so much for order flow because it gives them an exclusive window into where the market is moving. When firms see tons of orders coming in for Tesla, they can purchase shares for their own account, pushing up the EV-maker's prices for their clients when the next flood of orders arrives. "Order flow is everything," he says. "It tells you where the market is going next. It gives the high-frequency market makers a crystal ball and puts the small investor at a big information disadvantage. Seeing all that order flow gives a market maker information that the public doesn't have."

He insists that small investors don't understand the true costs of the commission-free regime. "They think it's all about not paying commissions, but they don't understand that the brokers and market makers are killing it on trading," he says. Belfort speaks from personal experience. "At Stratton Oakmont, it was never about commissions. We used to joke that commissions kept the lights on. We made almost all our money on the trading 'spreads.' There was never a time when I didn't know where the market in our stocks was going. It's the same with the high-frequency traders today handling GameStop orders."

Gauging the direction of prices is one of two ways traders clean up, he noted. The other is buying shares as close as possible to the "bid," and selling as close as possible to the "ask," so that the market maker pockets a big "spread." "Say XYZ stock has a bid of $50.00 and an ask of $50.10. The game is to buy at $50.00 or close to it, and sell as close to $50.10 as possible. The money is made in that middle ground," says Belfort.

In his example, if the market maker buys XYZ at $50.01 and sells at $50.09, it makes a fat, 8¢ spread. But if the firm "worked the order" by seeking buyers willing to pay a bit more, it could purchase for on behalf of its client at $50.05, and sell at $50.06. The seller gets 4¢ more, the buyer gets 3¢ off, and the trade costs the little guy just 1¢ instead of 8¢. "Traders' compensation depends on marking up trades and keeping wide spreads," he says. "You'd have to be Mother Teresa not to fall for that temptation."

All told, says Belfort, Main Street investors is shouldering more in total costs than if they paid commissions, and the brokers got them the best possible deal on trades. "Market makers shouldn't be paying for order flow and executing retail trades at the same time," he says. "That's dangerous for small investors."

In closing, Belfort said that he'd been circling the globe giving motivational speeches before the COVID lockdown hit and hopes to get back on the road soon. For the past year, he's been working mainly as an online consultant. "The cloud has made it so much easier to start a business cheaply," he declares. "I like companies already doing well, but also want to scale rapidly."

Belfort's website displays a tribute from the performer who immortalized him. "His ability to empower young entrepreneurs is a shining example of the transformative powers of ambition and hard work," writes DiCaprio. Surprisingly, Belfort seldom consults for securities firms. But his insight into the business where he hustled, thrived, and crashed is a primer in recognizing the new and lingering dangers facing the little guy.