This Thursday (18 Feb), Robinhood’s chief executive, Vlad Tenev, will become the latest tech boss to appear before the US Congress to answer questions about whether the technology he sells is a bit too disruptive. Also appearing will be Keith Gill, the 34-year-old financial analyst whose investment in and promotion of the video-game retailer Gamestop turned into a vast short squeeze that cost hedge funds including Melvin Capital billions (the chief executives of Melvin and Reddit will also be appearing – banking committee fans can watch it live here).
Keith Gill posts on Reddit’s r/Wallstreetbets forum as “u/DeepFuckingValue”. His long position on Gamestop was based on the idea that the company was undervalued, and he was joined in this by other well-known value investors such as Michael Burry (who famously bet against the subprime mortgage market in 2007).
But the 7 million people who joined Wallstreetbets last month were not value investors. Speculation on meme stocks has almost nothing to do with the company that once issued that stock, its fundamentals or the chance of sharing in its profits via dividends. It’s just a group of people arguing, loudly, about the price of something and staking their money on how many more people they think will turn up to the fight.
The line between investing and gambling has always been fuzzy. After the last financial crisis, ministers knew they needed to insulate retail banking and the rest of the economy from what Vince Cable called “casino banks”. But the growth of fee-free, app-based trading has re-established the link between the bank accounts of ordinary people and market volatility. And the technology involved has turned retail investment into something that looks much more like another fast-growing industry: online gambling.
In his 2012 book The Hour Between Dog and Wolf, the Cambridge neuroscientist (and former derivatives trader) John Coates describes how the physiology of traders – mostly young men – inflates market bubbles. Gains stimulate the production of testosterone, which encourages greater risk-taking. The “animal spirits” Keynes described in 1936 are just that: chemicals in the brain that reward market participants for taking risks.
The same link between testosterone and financial risk-taking is thought to encourage behaviour found in pathological gambling. Wallstreetbets is a high-testosterone environment, populated mostly by young men. Last year, when the community conducted a census on itself, responses put the community at more than 90 per cent male and more than 85 per cent within the 18-35 age bracket.
Many of the young men now betting on stocks may have found it easy to pick up because they already gambled on sport. One of America’s most popular sports pundits with young men, Dave Portnoy, ran a business supported by sports betting until the first lockdown of 2020, at which point he pivoted very quickly to become “Davey Day Trader”, broadcasting unmitigated enthusiasm about amateur day trading to millions of followers.
In the UK, the number of online gambling accounts has almost doubled in ten years, reaching over 30 million, and the number of people day trading has exploded in the past year. The average age of of a new Hargreaves Lansdown customer has dropped from 45 in 2012 to 37 in 2020.
On the forums of Britain’s biggest gambling charity, GamCare, there has been a recent rise in the number of people asking for help with problems related to day trading. “On Instagram and YouTube,” wrote one user last month, “everybody seems to be talking about trading and making money”; the same user lost £150,000 on trading in three years. Another post from last month describes an online trading app as “the most addictive form of gambling I have ever know[n]. I probably check the app around 200 times a day.”
Last year I spoke to James Williams, who spent ten years working on persuasive design at Google before becoming a critic of the attention economy. He had the Robinhood app open as we spoke. “I’m looking at a particular stock, and the value is going up and down at sub-second intervals,” he told me. “There’s no actual utility to that granularity of update. But it does then serve to grab your attention, bring you back into it. And it also suggests […] market activity […] there’s almost a suggestion – hey, there are all of these people out here engaging with this stock. And I think that contributes to a fear of missing out.”
Williams also explained how the design of trading apps could encourage betting on momentum – the number of people turning up – rather than the objective value of companies or commodities. Graphs appear without labelled axes, for example, so the shape of the curve is what matters. The speed and fluidity that have always been the goal of interface design are not in the user’s interest. It encourages instinctive, heuristic decision-making, not deliberation.
And just as gambling sites offer new punters a free bet, trading sites offer free stock to anyone thinking of signing up.
The pandemic, Williams told me, has got people accustomed to checking regularly on an “IV drip of fear-based numbers”; trading apps offer the same constant data-checking.
GamCare told me that the “factors which often contribute to vulnerability” to problem gambling, “such as financial distress and isolation – are ever increasing during the pandemic. With the ready availability of online gambling, as well as trading sites, there is a concerning context for people at risk. Those who have struggled to control their gambling may also be vulnerable to harm through trading sites, especially if they are not able to fully assess the risks involved or how volatile markets can be.”
For many new traders, however, that volatility – the explosive rises in the price of meme stocks and cryptocurrencies – is exactly why they’re getting into the market. No one ”investing” half a stimulus cheque in a meme stock is interested in a steady 7 per cent return; they want to double their money overnight. This is the psychology and economics of the betting shop.
But trading is not regulated in the same way as gambling. Gambling on credit cards was banned last year, but no such restriction applies to trading platforms. You can even buy risky, leveraged derivatives using a buy-now-pay-later scheme such as Klarna.
Every gambling company licensed in the UK must also sign up to Gamstop, a self-exclusion scheme that allows people to block access to all gambling apps and websites. Unfortunately if you search for “Gamstop” and the name of any online trading platform, Google helpfully corrects your search to “GameStop” providing a series of links to invest in a volatile and controversial equity.
Retail investing is a great idea. Done right, it genuinely does offer people and companies a way to profit in a constructive way. But politicians should be wary of the point at which investing starts to look like gambling, because even moderate gambling is, to be blunt, a terrible idea. In total, gamblers in the UK lost £14.2bn in the year to March 2020. Losses were highest, as a proportion of income, for those in the lowest income bracket. When I spoke to a data scientist at a gambling company a few years ago, they told me the average probability of walking away from any gambling experience without having lost money is roughly one in 100.
And while economic stimulus has kept markets buoyant, day trading is similarly risky in the long run: a two-year study of day traders in Brazil found that 97 per cent lost money, while a study in Taiwan found that less than one per cent of day traders are consistently able to make good returns.
Gambling has become a major public health issue in Britain, where there are about 400,000 problem gamblers. A study published in Nature by Oxford University’s Dr Naomi Muggleton last week found that a 10 per cent increase in gambling spend almost doubles a person’s chances of missing a mortgage payment. High levels of gambling increased the risk of mortality by 37 per cent over seven years. Politicians and public health experts should be asking if trading apps really do offer the democratisation of finance, or something more familiar.