Juggling Dynamite

The ‘Reddit mob’ has legitimate reasons to feel retaliatory against a financial sector that has increasingly been run by and for predators that are afforded advantage at the expense of their customers, economic strength, taxpayers and workers, worldwide.

But there should be zero delusion that broker/dealers, including the deceptively named ‘Robinhood’ (presently working with investment dealers to cash out its founders in an initial public offering), are platforms designed to “help the little guy.”

The truth is that the zero-commission services were adopted when it became clear that this would attract more users and financial intermediaries could make much larger profits selling their customer order flow to high-speed predators.

Decades of data and experience attest, meanwhile, that individuals expending their time and emotional energy trading financial instruments may ‘win’ periodically, but almost always end up losing money in the end.  See a few of the studies noted in Attention Robinhood power users: Most daytraders lose money:

Given this evidence, why does day trading persist, and why is it so popular? The authors concluded that very active traders seem to believe they know more than they really do. “Overconfidence can explain high trading levels and the resulting poor performance of individual investors,” the authors said.

Their conclusion echoes those of the other studies. “Our central message is that trading is hazardous to your wealth. … Those who trade the most are hurt the most.”

A world of financial platforms, news providers and services are designed to lure individuals with the ‘easy money’ siren song of security market participation.  The more fevered and long-lasting the buying frenzy, the wider the capital losses in the end.  This time won’t be different.

Recent high-profile fights between different groups of computer-enabled-levered traders are just more evidence of the wild-west that poor oversight, purchased advantage and revolving-door appointments have made of so-called ‘investment’ markets.  The loss-cycle this accentuates will hurt all participants, the overall economy and taxpayers.  Shit-show exemplified.  Senator Warren correctly connects the dots in this interview.

Sen. Elizabeth Warren lambasted the Securities and Exchange Commission on Thursday for the regulator’s failure to take action after a dayslong blitz of market speculation.

“We need an SEC that has clear rules about market manipulation and then has the backbone to get in and enforce those rules,” Warren said. “To have a healthy stock market, you’ve got to have a cop on the beat.  That should be the SEC,” she added. “They need to step up and do their job.” Here is a direct video link.

Good article on the frenzy of retail participants inflating stocks (and related capital loss prospects) with call options, see How option’s trading could be fuelling a stock market bubble.  Here’s a taste:

Since the sharp setback for tech stocks in September, retail traders have redoubled their interest in buying single-stock options, which have become especially popular among online amateurs who gather on Reddit and Discord to swap ideas and fawn over screenshots of both purported wins and gut-wrenching losses.

The momentum will probably last until markets turn down and these newly minted traders experience painful losses that, for many, will be the first in what has been an extremely short investing career.

Also, see FT:  Weaponised options trading

And, The Reddit GameStop Bubble is Just a Game–For Now:

There are two main causes of big market moves. The healthier one is when new information comes to light about a company, an industry or the economy at large, and financial assets are repriced to reflect it. The other is when market participants buy or sell in a rush, often because they suddenly need to protect their finances—in which case asset prices don’t convey much useful information.

The latter is at play now. Hedge funds’ short bets have been unsettled, forcing them to buy back the stocks to limit their losses. Also, punters have been using options contracts to prop up their targets. Such instruments can amplify even small market moves, because they force banks to take the other side and then hedge the risk by buying the actual underlying stocks. It can create a feedback loop: Those stocks then go up, and the value of the options tied to them increases even more, forcing banks to hedge further, and so on.