Dotcom Day Traders are a Cautionary Tale for Robinhood’s Financial Justice Warriors
To judge from the bluster on Reddit’s WallStreetBets forum, Robinhood’s merry band of Financial Justice Warriors believe they’re on to something new. They’re not. They are the progeny — both strategically and, in some cases perhaps biologically — of dotcom day traders. The dotcom experience didn’t turn out well for that era’s wannabe Masters of the Universe. There’s reason to believe the FJWs will fare even worse.
It is difficult now, when “day trader” is a term of derision, to remember the days in the late 1990s when it seemed sensible for professionals to abandon their jobs to trade dotcom stocks at home. When the bubble popped in early 2000, “day trader” became an epithet — a caricature of an unshaven guy with boxer shorts, bunny slippers, a beer gut and a basement office. But before that, a lot of people wanted to “stick it to the man” (a phrase adopted by today’s Robinhood FJWs) and make a fortune betting on moonshot internet IPOs.
The dotcom day traders and the FJWs share different varieties of willful ignorance. It is almost forgivable in the dotcom case, because everyone on Wall Street was in on the game. Analysts with ostensibly reputable firms — some of the most vocal of whom, like Amazon shill Henry Blodget, have bounced back — peddled the fantasy that earnings and revenues were far less important than clicks. Their employers were busy pumping “pre-revenue” companies through their IPO mills. The Nasdaq was skyrocketing. Everyone was happy. Then the music stopped.
But even in the headiest days of the dotcom mania, few dotcom day traders made money. The tiny little floats characteristic of dotcom stocks meant they were hugely volatile, so trading in and out of positions daily, net of brokerage fees (remember those?) often generated mediocre or negative returns.
Granted, the FJWs operate in a different world from their dotcom forebears. The first big difference is in market structure. The dotcommers paid commissions on their trades. These were modest — prices were coming down as online brokers like DLJ Direct and Schwab battled for market share, and old-line commission-driven brokers like Merrill and Smith Barney looked on in horror. The online brokers gathered assets by trying to offer the best service — competing on price, execution and useful extras like research.
That’s all changed. Today’s Robinhood FJWs don’t pay to trade — at least, they think they don’t. In fact, they are part of the social media business ecosystem established by the likes of Google, Facebook and Twitter. Users of Robinhood aren’t buying steaks — they’re the cows. Or, as Tristan Harris put it, “If you aren’t paying for the product, you are the product.”
Robinhood’s app gathers trades like Facebook and Twitter gather attention, and it sells the trade information via payment for order flow to market makers that exploit it. (Yes, I know, Chinese Walls, yada yada. So why are market makers paying for it? Is anyone awake at the SEC?) When Robinhood crashes or puts limits on buying stocks because it gets massive margin calls from central counterparties, its users squeal. Well, cows in the abattoir might not like it when the blade gets too dull, but nobody really cares what cows think.
The second difference is more nuanced — both dotcom and FJW traders employ willful ignorance of asset values, but in different ways. Dotcommers brayed “this time it’s different” to justify their dismissal of the basic physics of finance — that a stock is supposed to be worth something because the company is worth something, and will earn enough to justify the price. The value of stocks became completely divorced from their companies’ prospects.
By contrast, the Robinhood FJWs don’t have a clue how Wall Street works, and they don’t seem to care. Their desire to “take on Wall Street” is chum in the water for “Wall Street” firms that happily exploit them. Their attack on hedge funds — an asset class that represents a shrinking slice of financial services and has been dying on the vine due to underperformance for years — is pathetic. Their signaling via social media is snapped up by canny (hedge fund) portfolio managers who make gazillions by plowing into the GameStops that Robinhooders target. So much for sticking it to the man.
Driving GameStop’s price through the roof, even if it gives FJWs a dopamine rush, just shows how the market has become decoupled from reality — just as it did during the dotcom era. This time, the traders justify their greed as a blow for Financial Justice. But — in a psychology that parallels the cryptocurrency mania — the result is that an asset’s value becomes only what the next fool will pay for it.
The third difference is the composition of the trading community. Day traders typically left jobs. They might have been soul destroying corporate drone jobs, but they were jobs. When things crashed and burned, they went back to those jobs. In 2001, when I was hiring financial journalists for a magazine in New York, a bunch of the resumes I received were from people who left jobs in 1998 and 1999 to trade full time. I even hired one or two, based on solid experience prior to their day trading interregna.
To judge from WallStreetBets, a lot of the FJWs are young and have never had professional jobs where they might have learned how Wall Street really works. Some are manifestly unemployable, including many of the top meme-generators, who curse like ghetto thugs and vomit emojis like 12-year-old girls. In the economy today, where being smart is necessary but not sufficient, a lot of the top FJWs on WallStreetBets will be hopelessly outgunned. When the current bubble pops — if the Fed ever lets it — what will become of these people?
A grudging respect for the fundamentals of valuation emerged after the dotcom crash. Day traders went back to work. Today, expectations of asset values are completely unhinged. We live in a world where it is perfectly acceptable to say “the value of Bitcoin is…” without blushing. Given this, it is unclear whether and how our broken stock market can be fixed. Lots of FJWs don’t want it to be — they like picking up the rubble of its fallen lintel and pediment and throwing it at their targets. But something’s going to happen. And it won’t be good for Robinhood’s cows.
Originally published at https://cassmaterialism.substack.com.
