Who gets to be reckless on Wall Street?

In the wake of the day trading frenzy which has swept across America and India during the Covid lockdown, there has been plenty of media commentary on this phenomenon. Millions of middle class people in both countries have taken to online trading in the past three months and as this piece describes, they are not all financially illiterate people who are lemons waiting to skinned by institutional investors.
At its centre of this phenomenon lies the wildly popular trading app, Robinhood. This piece in Vox beautifully captures how a smart User Interface, cheap (QE) money, a clever business model and WFH propelled Robinhood into the lives of millions of ordinary Americans: “Traditionally, stock-trading has come with a fee, meaning if you wanted to buy or sell, you had to pay for each transaction. But companies like Robinhood have taken a jackhammer to that system by offering commission-free trading. Other major online brokers — Charles Schwab, E-Trade, and TD Ameritrade — have followed suit. Many brokerages are also letting people buy fractional shares, so if you don’t have the $3,000 to invest in Amazon stock, you can put in $300 to buy one-tenth of it.
Trading isn’t really free, and big market-makers like Citadel Securities and Virtu Financial pay millions of dollars to process the trades and put them back onto the market, making money off of the spread — the price difference between the buy and the sell. Nathaniel Popper at the New York Times recently outlined how Robinhood makes money off of its customers, and more than other brokerages.
“It gives the appearance that you’re not paying a commission, but it’s just hidden,” said Jim Bianco, president and macro strategist at Bianco Research.
But the perception that it’s frictionless and free has helped boost retail trading, and during the pandemic, people have flocked to trading platforms to try their hand at the market. Robinhood, in particular, has become representative of the retail trading boom. The platform, founded by Vlad Tenev and Baiju Bhatt in 2013 and launched in 2015, says it has about 10 million approved customer accounts, many of whom are new to the market. Its mission is to “democratize finance for all,” according to its website.”
Robinhood’s app is designed to get people hooked with minimal fuss thus highlighting the increasingly important role of UI/UX in creating successful apps: “Robinhood’s version of financial democratization feels deliberately like a game. When you sign up, it offers you a free stock, generally under $10, and encourages you to invite your friends to get more free stocks. The screen turns green when you’re up and red when you’re down, and when you trade, it sometimes sends you confetti and gives you the money instantly so you can trade again. It’s easy to see how people get sucked in fast.
“Robinhood feels very gamified. The act of trading stocks was boring for a really long time, and even today, if you do it through Charles Schwab, it would seem boring. Robinhood makes it feel frictionless and fun and easy, and it can be very, very addicting,” said Noah Whinston, who founded an eSports franchise. He does some trading for fun on Robinhood but does most of his investments through a financial adviser. “I’m well aware if I put a lot of money into Robinhood, I might allocate that in ways that are not the smartest but instead based on short-term serotonin hits.”… “It’s the same exact rush you get sitting down at a blackjack table,” said Luke Lloyd, a wealth adviser at Strategic Wealth Partners. He says he worries about a new generation of traders getting addicted to the excitement. “It’s like putting all of your money on one number at the roulette table.”
Alongside the rise of Robinhood, a parallel development has been the rise of a new wave of finance gurus who don’t wear suits or write in the Financial Times. Given the role of social media in shifting the political compass to the right in multiple democracies, there is no reason to believe that social media might not have a corresponding impact on the financial markets: “Traditionally, investors have been told to read the Wall Street Journal and comb through corporate filings to make decisions. This new cohort of traders has other ideas — some are swapping the Financial Times for Reddit and Warren Buffett for Dave Portnoy.
On Reddit, many traders are gathering on the subreddit r/WallStreetBets, a coarse, bro-y space that describes itself as “like 4chan found a Bloomberg Terminal” and is now 1.3 million members — or, in its terms, “degenerates” — strong…The subreddit is, as is par for the course on Reddit, quite ugly and excessive — users refer to themselves as “autists,” talk about “YOLO-ing” their money away, and post screenshots of their brokerage accounts showing massive losses or gains. But it’s also influential: As Luke Kawa wrote for Bloomberg in February, some stocks skyrocketed after being mentioned there, and there’s broadly an attitude that traders can try to make stocks move there through the force of sheer collective will….While the force of r/WallStreetBets is a collective one, Dave Portnoy, the founder of the blog Barstool Sports, is putting on a one-man show of sorts around the stock market. Portnoy, 43, started day trading earlier this year. He livestreams himself daily trading as “Davey Day Trader Global,” or #DDGT, and claims to be the captain of the stock market. His antics can be pretty ridiculous — in June, he accidentally bopped himself on the head with a hammer anticipating market close — but he’s super entertaining. While he’s acknowledged major losses, his focus is on gains and the mantra that “stocks only go up.” The basic belief is that, eventually, prices will improve.”…. Tyler Grant, a lawyer in New York, followed Portnoy into Spirit Airlines and made money off the trade,… “His legacy is going to be the fact that he got people who realized they can get in the game and get in the game really cheaply,” he said.”
Like all great stories around greed & fear, there is an ugly side to this one as well: “In June, 20-year-old student Alex Kearns from Illinois died by suicide after thinking he’d lost $730,000 on an options trade on Robinhood. In a note to his family, he said he had “no clue” what he was doing. Robinhood subsequently said it would make adjustments to its platform to put in place more guardrails around options trading. It’s still scary: As the Financial Times notes, when he died, Kearns actually had a $16,000 balance in his account, not a $700,000 debt.”
Events like these underscore the gravity of this phenomenon. Organised finance – whether it is Wall Street or Dalal Street – has not covered itself in the glory over the past 20 years. Nobody that we have met in the US or India sees institutional fund managers as the good guys who have contributed to society or to the more modest cause of helping people build healthy retirement pots. Hence, the masses are justified in asking, “Why shouldn’t I try myself to look after my financial future?”. The pros have failed and now that technology has advanced far enough to democratise access to the stockmarket, the proletariat is not going to be content just sitting at home and watching talking heads on CNBC:
“Yes, most speculators and day traders lose money. But the pros don’t do infinitely better: Hedge funds and professional stock pickers consistently underperform the S&P 500. It’s easy to chafe at Portnoy’s attitude and approach — not to mention issues of toxicity in Barstool’s culture — and at r/WSB’s tone. But what about private equity firms that buy up companies, fleece them, and then sell them off for parts? Or hedge funds that scooped up troubled assets during the financial crisis to make billions? Or the market-makers like Citadel Securities that are ultimately the ones making money off Robinhood’s trades?”