Stratton Oakmont, and How Brokerages Really Work
By Fiscal Focus | May 07 2025
When most people think of stockbrokers, they picture suits, phones ringing off the hook, and high-stakes trades. But much of that image comes from Hollywood, specifically from films like The Wolf of Wall Street, which showcased the rise and fall of Jordan Belfort and his firm, Stratton Oakmont. Behind all this, though, is a valuable lesson in how brokerages function and what happens when they’re abused.
Who Was Jordan Belfort?
Jordan Belfort founded Stratton Oakmont in the late 1980s. The firm wasn’t located on Wall Street; it was actually based in Long Island, but it became infamous for using aggressive, manipulative tactics to sell, considered, worthless stocks to everyday investors. It made millions for Belfort and his team, but at the cost of destroying many consumers' savings.
Stratton Oakmont was a "boiler room" operation. That means a sales floor full of brokers who cold-called potential investors and used high-pressure tactics to convince them to buy speculative stocks. Often, these stocks were part of "pump and dump" schemes, where the firm would inflate the price artificially, kind of like price gauging, sell their own shares for a huge profit, and leave their clients with the losses when the price collapsed.
Belfort eventually pleaded guilty to fraud and money laundering. But his story is not meant to be just a scandal, but a lesson of what would happen if brokerages went wrong.
What Is a Brokerage?
At its core, a brokerage is a firm that connects buyers and sellers in the financial markets. If you want to buy shares of Apple, you can’t just Venmo Apple and call it a day. You go through a broker—whether that’s an app like Robinhood, a bank like Fidelity, or a full-service firm with financial advisors.
Brokerages make money in a few important ways:
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Commissions: Charging a fee for every trade (though many online brokers now offer zero commissions).
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Spreads: Earning a small difference between the buy and sell price.
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Payment for Order Flow: Some brokerages get paid by market makers for routing your trades to them.
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Margin Lending: Offering clients the ability to borrow money to trade (at interest).
There are different types of brokerages, too:
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Full-Service Brokerages: These offer personalized financial advice, research, and retirement planning, but usually at a higher cost.
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Discount Brokerages: Robinhood, E*TRADE, or Schwab; give you the tools to trade on your own, with lower fees.
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Online Platforms & Robo-Advisors: These use algorithms to manage your investments automatically, which is great if you wish to remain hands-off.
What Stratton Oakmont Did Wrong
Belfort’s brokerage crossed the line from selling to scamming. Here’s how:
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Misleading Clients: Brokers at Stratton Oakmont didn’t just recommend bad investments—they hyped up worthless stocks they had a financial interest in pumping.
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Market Manipulation: By buying up cheap stocks themselves and then pressuring clients to do the same, the firm created artificial demand and inflated prices, causing fluctuations in the market.
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Transparency: Clients weren’t told the brokers stood to gain massively from these sales, and the firm often dumped its shares just as prices peaked, leaving clients with numerous losses.
In short, Stratton Oakmont rather exploited its clients, instead of serving them.
How Things Have Changed?
After scandals like this, regulatory agencies like the SEC (Securities and Exchange Commission) cracked down on bad firm behavior. Firms today are required to follow strict disclosure rules, act in their clients best interests, and register with FINRA and other oversight bodies.
Still, the financial industry isn’t perfect. Some modern brokerages rely heavily on gamification, which can encourage risky behavior in young and inexperienced investors.
That’s why financial literacy matters more than ever.
Final Thoughts
Jordan Belfort’s story is a wild ride of excess, manipulation, and downfall, but it also serves as a cautionary tale. Brokerages are supposed to help you invest, not trick you into increasing firm profits. Today’s tools give individuals more control and transparency than ever, but that power comes with responsibility.
Before you trust any brokerage, understand how they make money, what incentives they have or may offer, and whether their interests align with yours. Having a better understanding of the system may make you less likely to get played by it.
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