How ‘Robin­hood’ day traders cre­ated Wall Street havoc

New in­vestors like Dave Port­noy are happy to take ran­dom risks, writes Louis Ash­worth, even when the odds are stacked against them

The Daily Telegraph - Business - - Business -

‘Th­ese traders marked spon­tane­ity, are by ag­gres­sive trad­ing, a dis­dain for in­vest­ment’s sa­cred cows and a big serv­ing of self-loathing’

The Scrabble bag may have been a step too far. Ear­lier this month – sat in front of a sign say­ing “stocks are easy” – Dave Port­noy ex­plained his in­vest­ment phi­los­o­phy. “You just take a cou­ple let­ters, you mush ’em to­gether, you press ‘buy, buy buy’, and you watch it go up, up, up. That’s how this works,” the sports blog­ger-turned-in­vestor told his fans.

A few days later, prompted by some gen­tle rib­bing of his claims on CNBC, Port­noy made good on his boast. Rip­ping open a new box of the tile-based word game, he drew R and T – point­ing him to­wards de­fence con­trac­tor Raytheon.

“Don’t know noth­ing about it,” he said. “Two hun­dred grand, mar­ket or­der – done.”

Since then, Raytheon shares have fallen about 5pc. While Port­noy’s trade may not go down as one of his­tory’s great in­vest­ments, it epit­o­mised a cor­ner of the trad­ing world that has gained in­creas­ing at­ten­tion in re­cent weeks. Port­noy – who be­came an in­ter­net celebrity after launch­ing the Barstool Sports blog – has be­come the doyen of a new breed of day traders.

Known as “Robin­hood in­vestors”, after the com­mis­sion-free trad­ing plat­form many use, they have re­ceived some blame – fairly and un­fairly – for the wild mar­ket rally of re­cent months.

Con­gre­gat­ing around on­line blogs and fo­rums, th­ese traders are marked by spon­tane­ity, ag­gres­sive trad­ing, a dis­dain for in­vest­ment’s sa­cred cows and a big serv­ing of self-loathing. They fo­cus on in­di­vid­ual stocks, and win – or lose – big. In a re­search pa­per ex­plor­ing the phe­nom­e­non, an­a­lysts at Ger­man in­surer Al­lianz wrote: “Th­ese newly baked in­vestors have lit­tle prior ex­pe­ri­ence in trad­ing nor a sound un­der­stand­ing of the cap­i­tal mar­kets. They ig­nore the fun­da­men­tals and seem to be pro­voked by the Fomo [fear of miss­ing out] phe­nom­e­non as well as gambling in­cen­tives pro­moted on [so­cial net­works].”

Mes­sag­ing board Red­dit’s Wal­lStreetBet­s com­mu­nity, which has around 1.3m mem­bers, of­fers an in­sight into many of the group’s key predilec­tions: supreme mar­ket masochism, bizarre meme-based the­o­ries and an un­healthy rev­er­ence for its own mi­nor deities: Tesla founder Elon Musk, and US Fed­eral Re­serve chair Jerome Pow­ell (var­i­ously called J-Pow, JPOW, J Pow Wow and a va­ri­ety of other names). It is likely that many of th­ese “new re­tail­ers” have done well. Wall Street has soared since March’s nadir – the sec­ond quar­ter, which ended on Tues­day, was the best since 1998, with gains driven by the con­tin­ued rise of Amer­ica’s tech gi­ants.

JP Mor­gan an­a­lysts, led by Niko­laos Pani­girt­zoglou, say the new re­tail­ers have cre­ated a “gen­er­a­tional split” in the world of re­tail in­vest­ment, which rep­re­sents about 37pc of US to­tal stock own­er­ship, ac­cord­ing to the Fed­eral Re­serve.

“The older co­horts of the US re­tail in­vestors’ uni­verse tend to in­vest in equities via equity funds,” they wrote in a note to clients. “In­stead the newer co­horts, in­clud­ing mil­len­ni­als, pre­fer to in­vest di­rectly in in­di­vid­ual equities rather than via equity funds.”

That drive to­wards pick­ing out in­di­vid­ual stocks – as op­posed to the pop­u­lar prac­tice of in­vest­ing in in­dex track­ers and other funds – has re­vealed a breed of com­pany that at­tracts this new breed of traders: the lost causes. Bar­clays’ equity strate­gists, led by Em­manuel Cau, say such in­vestors have be­come par­tic­u­larly ex­posed to so-called penny stocks – cre­at­ing some strange move­ments along the way. “It does ap­pear that they are most in­ter­ested in such stocks in the hope that, given the low ab­so­lute share prices, their chances of higher re­turn from such beaten down stocks are high, ir­re­spec­tive of their fun­da­men­tals,” he writes. Per­haps the great­est ex­am­ple of this strange phi­los­o­phy was car rental chain Hertz, which filed for bank­ruptcy in late May

– be­fore see­ing its share prices soar as Robin­hood in­vestors piled into the group in hope that it would re­ceive a bail-out. The move had the bizarre ef­fect of pump­ing up Hertz’s share value enough that the group’s man­age­ment made a last-ditch at­tempt to raise funds – be­fore hit­ting a reg­u­la­tory wall.

Hertz was not the only com­pany to find it­self caught in a re­tail stam­pede. As the pan­demic forced work­ers home, fool­hardy in­vestors ac­ci­den­tally boosted the shares of Zoom Tech­nolo­gies – an on­line ser­vices group that un­for­tu­nately has no con­nec­tion to Zoom Video Tech­nolo­gies, which owns the pop­u­lar video-con­fer­enc­ing soft­ware. In May, the FANGDD Net­work Group found it­self in a sim­i­lar sit­u­a­tion as a slew of Robin­hood in­vestors – pos­si­bly search­ing for a bas­ket of Faang (Face­book, Ap­ple, Ama­zon, Net­flix and Google) stocks – piled into the group, a small Chin­abased real-es­tate firm. “De­spite be­ing iso­lated events, one only has to spend some time on pop­u­lar Red­dit com­mu­ni­ties to get a broad idea of the cur­rent mar­ket hys­te­ria and the risks that ‘new re­tail­ers’ are tak­ing,” say Al­lianz’s an­a­lysts. Beyond th­ese fringe cases, how­ever, it ap­pears un­likely that Robin­hood’s mot­ley crew have the power to swing the main mar­ket. The app’s es­ti­mated $20bn (£16bn) in client as­sets un­der man­age­ment make it a min­now com­pared to sec­tor ti­tans such as Charles Sch­wab.

“While the above ref­er­enced strate­gies of ‘Robin­hood’ in­vestors ap­pear to have ma­te­ri­ally im­pacted a smaller por­tion of the mar­ket, it re­mains to be seen whether their ac­tions could cre­ate rip­ple ef­fects across the broader equity mar­ket,” says Cau. The dura­bil­ity of the phe­nom­e­non is also in ques­tion: not least be­cause the in­crease in trad­ing has gone hand-in­hand with a surge in the amount of spare cash held by US house­holds, and a de­cline in op­por­tu­ni­ties for sports bet­ting as events closed down. “The in­crease in the num­ber of users co­in­cided with the surge in sav­ing rate and cash hold­ings,” Cau con­tin­ues. “It re­mains to be seen if this new source of bid to equities will re­sist the re­moval of fur­lough schemes and the sub­se­quent hit to dis­pos­able in­come if un­em­ploy­ment does not fall quickly again.”

As for Port­noy, he ap­pears un­per­turbed by his Raytheon miss.

In a video posted to Twit­ter on Tues­day, he swung a green ham­mer while yelling “stocks only go up!” – shortly be­fore ac­ci­den­tally hit­ting him­self in the head.

“I’ve got a wild headache,” he said. Some in­vestors may agree.

Dave Port­noy ran­domly chose let­ters from a Scrabble bag to in­form his next in­vest­ment de­ci­sion

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