Retail Trading, the Horse Racing of Financial Markets
Has the recent spike in Robinhood traders proven beyond doubt that retail trading has been the Coronavirus substitute for gambling?
"Doing stupid things,"
claims Leon Cooperman, Omega Advisors CEO
‘Robinhood’, ‘Retail Trading’, and ‘Retail Punters’ are terms you’ve hardly been able to avoid in recent weeks, with Bloomberg and The Financial Times publishing articles discussing the impact ‘Robinhood’ investors are having on aggregate market prices. Data-site ‘Robintrack’ downloads and stores the price and popularity of every stock, each hour, from the Robinhood API, making it very easy to analyse trends and form a view regarding the potency of such trading. Notably, Robinhood’s facilitation of retail trading has come under criticism from Ryan Preclaw’s team at Barclays, and Omega Advisors CEO, Leon Cooperman, who claimed on CNBC’s Halftime Report (June 15th) that Robinhood traders are “doing stupid things,” and argued, by continuing to “let them buy and trade,” they “will end in tears.”
Deliberation over the increased amount of retail trading has primarily focused on whether Robinhood activity is distorting market prices, such that economic recovery is being exaggerated. Despite Investopedia providing statistics to support the narrative (Exhibit 11), Barclays concludes that there is no clear relationship between aggregate retail investor positions in S&P500 stocks (up from 4 million to 12 million since December 2019) and the returns of the index, as a whole.
Retail trading is not subject to the same stigma as sports betting, but by exploring the ease with which one could seamlessly transition, the spike in ‘Robinhood’ activity has brought to the forefront the idea that retail trading is the Coronavirus alternative to gambling.
Horse Racing vs Retail Trading
Let me introduce you to the Betfair Exchange:
You’d be forgiven for thinking 'Figure 1' (see below) was graphing the price movements of a financial asset on the Chicago Mercantile Exchange, or for believing you were looking at a Bid-Offer spread. Therefore, you may not be surprised to learn that the founders of Betfair have had independent careers in finance and having floated Betfair on the London Stock Exchange in 2010, valued at £1.4 billion, that it is now a FTSE 100 company.
Andrew Black reputedly excelled in mathematics at school and had a short career in London with a derivatives company. Edward Wray is part of the executive council for Balderton (a venture capital company) and holds directorships at Funding Circle, LMAX, Property Partner and Prodigy Finance.
Discussions around the recent spike in retail trading activity have cited complexity, yet I feel the increase is more straightforward. Professional traders and professional sports gamblers both pursue long-term profit, and effective analytical techniques are fundamental to success. A successful sports gambler must adopt appropriate risk management and have a proficient understanding of the necessary behavioural and psychological disassociation with a bet. The suggestion being, these individuals would be capable of embracing the analytical tools necessary to thrive as a retail trader, and it could be argued that an individual able to navigate the Betfair Exchange would be able to navigate simple trading platforms. Therefore, should we be surprised that a lack of sport has resulted in an increase in retail trading?
The line graph in ‘Figure 1’ represents the price movements (odds) for a selected horse, and the bar chart shows the volume of money wagered at each price, combining to reflect the markets' expectations.
In terms of ‘financial jargon’, having placed a bet, the punter is now ‘in the trade’, and similar to retail trading, any significant market movement pre-race will influence the ability to cash out for a profit or loss, testing their nerve.
Similar to ‘ladder options’, the monetary values running horizontally are equivalent to the number of contracts waiting to be filled at that particular price.
Source: Screenshot of the market price movements
for a selected horse on 23 June 2020
taken by author from Betfair Exchange app
The lack of success amongst a host of inexperienced retail traders infers the same behavioural and psychological flaws associated with unsuccessful gamblers. Inexperienced traders do not ‘trade their process’, meaning that whilst ‘in a trade’ they are influenced by price changes in the market and choose to act in a way that is inconsistent with their analytical process. Similarly, the Betfair Exchange offers ‘in-play’ wagering and therefore encourages punters to abandon their analytical process pre-race and ‘Back’ or ‘Lay’ (similar to going ‘long’ and ‘short’ in financial markets) a horse during the race. This behavioural process is prominent in financial markets and it can create a ‘Christmas tree’ effect with buy and sell icons cluttering the chart.
Further comparisons between the psychological processes behind retail trading and gambling can be made when considering a tendency to become attached to a firm or a horse that has previously resulted in a successful outcome. The emotional attachment with that particular trade may supersede the impartial analysis in the future.
The Securities and Exchange Commission (SEC) and the British Horseracing Authority (BHA) are responsible for ensuring efficient markets that protect investors and punters, and to investigate any market manipulation. Significant price movements are often used as an outcome indicator and speculation regarding market manipulation, and data leaks prior to macroeconomic announcements, or horse races, mean individuals may choose to follow these price movements.
Successful trading and gambling both require effective analytical techniques, and having recently completed a summer internship with Amplify Trading (a macroeconomic intraday multi-asset trading company), I recognise the importance of scheduled and un-scheduled macroeconomic events have on asset prices.
Without the benefit of financial markets education, punters may not be able to articulate their technical analysis techniques or have a conscious understanding of the theoretical and macroeconomic factors that influence their choices. Nevertheless, by considering the industries side by side, it is apparent that there are transferable skills.
Successful returns generate an addictive euphoria whereby individuals covet that next trade in order to satisfy the desire for that feeling. Put simply, there is scope for suggesting that even proprietary trading is a professional ‘upmarket’ form of gambling, without the attached stigma.
As of September 2019, there were 31.57 million online sports gambling customer accounts in the UK, generating an off-course annual turnover of 4.2 billion pounds worth of betting on horse racing. From these accounts, there will be many individuals with transferable behavioral and psychological skills. Having traded on a finance-style betting exchange, they may be keen to satisfy a desire for continued euphoria. Therefore, without sport, should we be surprised that there has been a spike in ‘Robinhood’ activity? Has this lockdown highlighted that retail trading has simply become the Coronavirus alternative to gambling?
By James Daly, BSc Business, Finance & Economics Student at Loughborough University
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