Who gets to be reckless on Wall Street?

Regular investors are piling into the stock market for the rush. Wall Street titans say they’re making a grave mistake, but it’s not so simple.

Emily Stewart

Jul 9, 2020, 8:00am EDT

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Jennifer Chang got into investing in 2019, but it was only during the pandemic that she started dealing in options trading, where the risk is higher, but so is the reward.

“With options, you can make money so much faster. So I was then having days where I would make $1,000 a day, and then I made $10,000 in a day,” she said. “And then I started getting really cocky, and I didn’t even think I could even lose so much money. Then during the day when it was like we had a really big drop, I lost everything I had made.”

Chang, 39, lost her job at a nonprofit in the financial downturn, fell down a “rabbit hole of stock videos” on YouTube, and by now has put about $25,000 into the trading app Robinhood. The day we spoke, she was basically back where she started. “I take it in stride, because it’s money I had made, but it wasn’t really there.”

She is not an anomaly. In recent months, the stock market has seen a boom in retail trading. Online brokerages have reported a record number of new accounts and a big uptick in trading activity. People are bored at home, sports betting and casinos are largely off the table, and many look at that $1,200 stimulus check they got earlier this year as free money. Some are taking cues from mainstream sources like the Wall Street Journal and CNBC, others are looking at Reddit and Barstool Sports’ Dave Portnoy for ideas (and entertainment). And commission-free trading on gamified apps makes investing easy and appealing, even addicting.

“It’s kind of scary, because I am unemployed right now, I don’t want to put too much at risk. But I think I have enough in savings that I’m willing to take that risk a little bit, because I also really like gambling,” Chang said. She’s not sure what all of this will mean for her taxes.

I spoke with more than a dozen traders about where they’re putting their money, why, and how it’s going. Some are doing well, while others have learned some hard lessons already, and they’re aware things can get out of control — most of the people I talked to referenced a 20-year-old Robinhood trader who died by suicide in June after believing he’d lost hundreds of thousands of dollars on the app. Still, for a lot of them, it’s largely a game.

“It’s boring watching stocks, it’s not exciting, they’re not making these crazy prices,” said Adam Barker, a 31-year-old software engineer in Massachusetts. “You don’t get a rush throwing money at Berkshire Hathaway and waiting 15 years.”

Whatever the strategy of this new crop of traders — or lack thereof — they have Wall Street’s attention. They remain a small portion of the market, but there is evidence they’re making a difference along the margins. They’ve ignored predictions from high-profile investors that another crash is on the horizon, and thus far, they’ve been right. Many of them relish in their battle against the “suits” to prove that anyone can play in stocks.

There’s been plenty of finger-wagging in their direction: Billionaire investor Leon Cooperman in June said they’re just doing “stupid things” and that the momentum will “end in tears.” Oaktree Capital co-founder Howard Marks warned it’s “not healthy to have people buying stocks for fun.”

While there’s certainly cause for concern some might be in over their heads, it’s also hard to argue that financial opportunity should be cordoned off for institutions and the rich, especially in an economy plagued by inequality where financial mobility, for many, is a myth.

The trading game

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. “We fundamentally believe participation is power, and that the stock market can be an important wealth creation engine,” a spokesperson for Robinhood said.

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.”

Some people are able to resist the temptation, like Nate Brown, 23. He got his first job out of college working in government tech and decided to try out investing. “I buy stocks once a month, so probably not as often as you’d expect just because I’m trying to follow that longer trend,” he said. “I saw the options thing on the app, but it honestly kind of scares me.”

But Brown seems more like the exception in this current cohort of day traders, not the rule. What they’re doing isn’t really investing, it’s gambling.

“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.”

Some traders have become especially enticed by more complex maneuvers and vehicles. A big draw appears to be options trading, which gives traders the right to buy or sell shares of something in a certain period. People can use options to hedge their portfolios, but most of the traders I talked to were using them to make bets as to whether a stock would go up (a call) or go down (a put) and inject some extra adrenaline into the process.

“There’s a lot of risk involved, and you can definitely see why people get into the gambling side of things. It’s definitely the rush,” Barker, the Massachusetts software engineer, said. He kicked about half of his stimulus check into Robinhood and is mainly trading options. “I’m not really in it for the long term.”

The Robinhood spokesperson said the company believes it’s “time to move away from the notion” that it’s gambling or gaming and disputed that the app is gamified, instead saying that what it has is “accessible, modern design.” The spokesperson emphasized that it doesn’t display confetti for every trade and disputed that confetti is a reward, but instead is “celebrating the achievement” of participating in markets. The company also said most of its customers aren’t day traders and that 12 percent make an options trade on average each month.

Reddit and Dave Portnoy, the new kings of the day traders?

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. (For comparison, the r/investing subreddit has 1.1 million members.) 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.

At the very least, it’s a place people are hanging out and looking for ideas. And they sometimes make decisions based on little information beyond seeing a stock ticker float by or seeing a recommendation or news flash from an anonymous person online.

“Strategy? I wouldn’t use that word to describe it,” Nick Thoendel, a project manager in commercial doors and hardware in Alabama, told me when I asked him about his strategy for investing the $1,000 he’s got in Robinhood. “Just really whatever everyone’s talking about.”

Tom Pariso, 40, who works for Riot Games in Los Angeles, has been trading through Robinhood for a couple of years, putting in about $15,000 in total, and got more enthralled thanks to the r/WallStreetBets community. “They’re complete strangers, but you feel like they know what they’re talking about,” he said. He had what he described as a “crazy couple of weeks where everything was clicking” earlier this year, and in March, he took to the forum to brag about his gains of more than $100,000. “Then all of a sudden, everything turned in the other direction,” he told me.

Pariso is now back to more or less where he started, but he can’t quit altogether. “I don’t know why. The app is so easy, and the interface, it feels like a game,” he said of Robinhood. He’s also still on the subreddit and feels like the conversation is getting darker there, with more users making coded references to suicide. Much of the time, he says, it’s joking, but he has started to report people to Reddit about the potential for self-harm. “There are people telling stories about how they cashed out of their 401(k) at the start of the pandemic and took their money that they had, got in at the wrong time, and lost everything,” he said.

If you or anyone you know is considering suicide or self-harm, or is anxious, depressed, upset, or needs to talk, there are people who want to help:

In the US:

Crisis Text Line: Text CRISIS to 741741 for free, confidential crisis counseling

The National Suicide Prevention Lifeline: 1-800-273-8255

The Trevor Project: 1-866-488-7386

Outside the US:

The International Association for Suicide Prevention lists a number of suicide hotlines by country. Click here to find them.

Befrienders Worldwide

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.

It’s not clear how many people follow Portnoy’s investment advice to a T — on July 1, he tweeted that Sonos should go bankrupt and it ended the day in the green. But he has caused a bit of a ruction on Wall Street. He is part of the conversation among some bigger names in investing and has been outspoken in criticizing certain figures. He declared billionaire investor Warren Buffett “washed up” and delivered a lengthy attack on Oaktree Capital and Howard Marks, decrying the firm as a “corporate raider” that engaged in “scumbag practices” in the wake of the Great Recession.

Tyler Grant, a lawyer in New York, followed Portnoy into Spirit Airlines and made money off the trade, though on other trades, he’s bet against him. “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.

Part of Portnoy’s shtick is that he claims to have no idea what he’s doing so he can’t be held responsible for where he invests or whether people follow him. One day in June, he talked about NSPR, the stock ticker for InspireMD, making him money because a woman he went on a date with told him about it and he invested $400,000 to impress her. Another day, he picked tiles out of a Scrabble bag to find stocks to invest in. Grant said he doesn’t believe it’s as random as it seems — after all, he picked Raytheon, a nearly $100 billion defense contractor. “It wasn’t like Dave Portnoy went into a bag and pulled out a penny stock,” he said.

Thoendel, from Alabama, tried to follow Portnoy into airlines for a bit, but it didn’t work out. He has a full-time job and can’t watch the livestreams anyway, though he still keeps up where he can. “His whole claiming he’s better than Warren Buffett and stuff is hilarious,” he said. “He’s just a shock jock, basically.”

While there is likely some overlap between the r/WallStreetBets crowd and Portnoy, it’s not clear how much. Portnoy appears to steer clear of options, while on Reddit, they’re an important focus. Another curious facet: When you try to post about Barstool Sports and Portnoy on the subreddit, you get an automatic response from a moderator: “Do not post about barstoolsports or David Portnoy here please. Doing so will mean a ban of arbitrary length.”

Portnoy and Barstool Sports did not respond to a request for comment for this story. The moderators of r/WallStreetBets’ initial response was “(っ◔◡◔)っ ♥ tits or gtfo ♥.”

When I pressed about Portnoy, I got a longer answer: “Well, first: WSB is not a part of any trend — we are the trendsetters, the makers of music, the dreamers of dreams, if you will. Second: Day trading is but a part of what we do here. Mostly it is memes and calling each other lovingly derogatory names.”

Stocks only go up until they don’t

The “stocks only go up” meme is correct in the sense that according to conventional wisdom, the stock market, overall, eventually does go up. That’s why when the market crashes, experts say not to sell and instead to wait it out. The problem is, when it comes to individual stocks or trading mechanisms that are more complex, it’s entirely possible to get wiped out.

That’s what happened to Jordan, a consultant in his 40s who asked to remain anonymous to protect his privacy. He had been trading for a while on Robinhood, but in March, the coronavirus lockdowns hit and he started trading more, including leveraged exchange-traded funds, or ETFs. Basically, when the underlying index or fund goes up or down, instead of following it at a one-to-one ratio, leveraged ETFs follow at a two-to-one or three-to-one pace. In Jordan’s case, he was focused on oil.

At one point, he was up 400 percent, but now, he’s given back those gains. “To be honest, I had no idea what I was doing,” he said. “I have nowhere near the fiscal acuity to understand how those trades work.”

That’s part of the problem with investing in general: It’s really hard to get it right, even for professionals.

Spencer Miller, who runs a Robinhood Stock Traders group on Facebook with his brother, rarely uses Robinhood because he knows it can compel you into taking on too much risk. (He named the Facebook group that because he knew it would get more members.) But he sees stocks trend in the group — Hertz, Genius Brands, Luckin’ Coffee — and then fade. He also sees people learning some hard lessons, gaining a bunch of money and then losing it fast. “Robinhood at times can feel like free money, especially if you get a few winners right off the bat,” he said. “You just see the same story over and over and over again.”

The hope with most of these traders is that they’re not making bets they can’t afford to lose. But inevitably, when people piled into bankrupt Hertz in June, someone was left holding the bag and paid $5.00 for a stock now worth $1.50.

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.

Miller recalled a similar mix-up once happening with him, where it appeared he’d lost $200,000 on the Robinhood app and then adjusted. “It’s the way Robinhood is set up, where everything flows nicely until the moment when it doesn’t seem to.”

And the app itself, like any tech platform, is prone to glitches. Robinhood experienced widespread outages in early March when markets were going wild, locking many traders out of making any changes to their portfolios. Herman Singh, 22, estimates he lost $3,000 during the shutdowns, and the company offered to pay him back $75. “For small traders, that’s a big amount,” he said. He’s still trading, but he’s now using other apps.

“It’s not just about investing in the market, but what is your wealth confidence overall? Do you have money in retirement? Do you have an emergency fund? Do you have savings? Credit card debt? Student loan debt? If you have any of the above, conversations about the stock market shouldn’t be coming out of your mouth,” said Lauren Simmons, a former stock trader at the New York Stock Exchange, cautioning about the risk of people getting into the market. “We are reaching historic highs again, and we are in a global pandemic.”

Who has the right to move markets

The stock market bottomed out in late March and has generally rallied since. Retail investors aren’t really the cause — much of the recovery is attributable to the Federal Reserve — but they’re making a difference in certain arenas.

“I don’t think we can blame retail traders for jacking up the market, but at an individual stock level, it’s a little bit different,” said Nick Colas, co-founder of the market insight firm Datatrek Research.

Small investors bought up shares of bankrupt companies like Hertz and JC Penney, temporarily driving up their prices, this spring. If you look at Robin Track, which follows the most popular names on the platform, most of them are recognizable and ones where major institutions are heavily invested to the point that traders with a few thousand dollars in their accounts aren’t going to do much — Ford, American Airlines, Disney. They are also generally fairly safe. But then there are more surprising and lesser-known ones, such as Aurora Cannabis.

As the Wall Street Journal reported, Options Clearing Corp. has seen a 45 percent jump in daily options contract trading averages this year compared to last, and Goldman Sachs found that options volume from single-contract trades of the 50 top-traded stocks is up from 10 percent to 14 percent. Goldman also estimates that the proportion of shares volume from small trades has gone from 3 percent to 7 percent in recent months.

“If nothing else, I think everybody agrees that retail trading today is orders of measure bigger than it was a year ago,” Bianco said.

To be sure, people basically gambling with money they would be devastated to lose is bad. On the other hand, it’s not clear that’s what’s happening en masse. And the traders, well, they’ve got a point: It’s not like billionaire investors are the good guys here, and why should they be locked out of the opportunities rich people are privy to?

“Do you have money in retirement? Do you have an emergency fund? Do you have savings? Credit card debt? Student loan debt? If you have any of the above, conversations about the stock market shouldn’t be coming out of your mouth.”

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? Or the money Robinhood itself is making pushing customers in a dangerous direction?

“I think Portnoy drives Wall Street crazy because he’s exposing some of the fallacies that you see on Wall Street,” said Bianco, who acknowledges he’s a “suit” in Portnoy’s world. “He’s making a mockery out of stock-picking because we all know on Wall Street the vast majority of stock pickers that run portfolios cannot beat the indexes.”

Portnoy is a multimillionaire, and he appears to be using a small portion of his total net worth to trade. He’s said once sports betting returns, he’ll go back to that, plus there’s no denying this is quite a marketing opportunity for him and for Barstool.

And the opportunity to invest in the stock market, even through commission-free platforms, isn’t available to everyone. You have to have some money to invest — Colas estimates the average account size is somewhere between $2,000 and $5,000 — and not everyone does. What’s more, it appears the majority of the people investing are men.

Still, the army of retail traders is reading the room. The stock market does, generally, recover, and the March collapse was an opportunity. There’s not a really lucrative alternative to stocks for generating returns, and the federal government and Federal Reserve have demonstrated they’re more than willing to take extraordinary actions to prop up the market and big industries. The government didn’t let the banks fail last time around, so it’s hard to believe they’ll let the airlines fail now — so why not invest?

“Really, we all kind of know they’re all going to come back,” Grant, the New York lawyer, said. “It would take a huge market collapse for there not to be a Delta.”

Of course, it’s possible the stock market will crash again or that we’ll see another correction. There is a fine line between giving people the ability to try to access opportunities to gain wealth and exposing them to predatory practices and unfair risk, like what Robinhood, seemingly pushing people toward options, is doing.

This flurry of retail traders has happened before. Before there was Dave Portnoy, there was Stuart, the fictional Ameritrade trader leading the way on the dot-com boom. Back then, everyone was into internet 1.0, Colas noted; now they’re just generally optimistic. “There is no unifying theme this time around,” he said. “There isn’t a theme that shovels billions of dollars into a raft of dumb ideas that have a common theme.”

Plus, it’s getting a new generation of people into investing, which Wall Street types should be fine with. Maybe they are.

Ultimately, the broader trading trend also says something about the economy. While for many people their new stock market habit is a game, it’s also one that’s accompanied by real goals — to pay off student loans, to start a business, to have a nest egg set aside for 20 years from now. Some people I spoke with even expressed guilt. Liam Walker, a data protection officer in the UK, said he considered investing in pharmaceutical stocks but decided against it. “Ethically, it’s strange to try to gain some sort of advantage out of the current situation that the world is in,” he said.

Alfredo Gil, 30, a New York writer and producer, expressed a similar sentiment of internal conflict with regard to his trading habits. Gil is trying to write a graphic novel and launch his own production company, and he hopes maybe the stock market is the way to save up enough money to do it. He’s investing in fairly safe vehicles — ETFs and companies like Disney and Tesla — and, depending on the given week, is up between $13,000 and $20,000. He admits that he checks his Robinhood account “often enough for it to be unhealthy.”

He worries about contributing to corporate greed and the corrupting powers of wealth, and most of his social circle know he’s investing. “I’m attending protests, and I’m very vocal with my friends about the current movement and defunding the police. To say, ‘Oh, I’m making a lot of money,’ it’s just not a cool thing to say or bring up.”

But Gil also sees that this is the system he lives in. Maybe if the United States had Medicare-for-all or universal basic income, he says, he wouldn’t be compelled to play the stock market, and things would be different. But they aren’t. “There is a strain of guilt I have regarding making money during this crisis that is increasing our inequality,” he said, “but as a gay person of color with no intergenerational wealth, I think there can be things to learn on how to navigate our world.”

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