For the legions of workers sent home in March, quarantine hobbies started out small. Banana bread, sourdough, herb gardens. But then long days and nights at the home office opened the door for more precarious projects — like retail investing.
Stuck inside without an outlet for his carefully designed sports betting model, Matthew Brownsword, a project manager at market research firm Edison Research, turned to the stock market. "I created a code that I can run at night, every night, and in the morning I buy stocks or sell stocks, and I just see how it does." With the abrupt cancellation of sports, the market's potential for a similar modeling hobby grabbed his attention.
Side projects have always been common for programmers, and algorithmic trading is just the latest hot hobby. The r/algotrading subreddit has doubled its subscriber base since the beginning of the year and is now adding anywhere between 700 and 900 new subscribers per day, on top of a 60% increase in daily viewership since before the pandemic, the moderators told Protocol.
This growing interest paints a big and complicated picture about the future of investing. Pandemic boredom and changing consumer habits haven't just created a new era of gamified day-trading — they've spurred interest in retail investing across the board. Financial experts told Protocol that since March, more millennials are opening retirement and brokerage accounts, moving savings into ETFs and experimenting with niche retail investing concepts, like algorithmic trading. The more sedate new investors tend to be older and more gender diverse, while most of the day traders in abundant and rapidly growing Facebook groups (some with tens of thousands of people) are young men. And of the traders who spoke to Protocol, the more tech experience they had (programmers and engineers, mostly), the more likely they were to experiment with algorithms that direct their trading for them.
Beyond just bored
The go-to narrative around retail investing has been simple: Reckless young day traders are creating market volatility and blowing up stocks like Tesla and Hertz. Barstool Sports founder Dave Portnoy has inspired his legion of fans to embrace day trading with cult-like enthusiasm. The stock-trading app Robinhood has gamified investing by designing a platform more like a social media app than a Vanguard website.
"When it comes to a lot of new traders, it's greed. Greed is the number one bad attribute in trading," said Jon Cabral, one of the founders of a futures trading group on Facebook with more than 7,000 members. "Young, dumb" investors are causing a "nightmare" in the market, Cole Smead, the president of Smead Capital Management, recently told CNBC.
At first glance, the data seems to back this up. TD Ameritrade added a record high number of retail accounts in the third quarter — 661,000 — and hit all-time highs for daily average revenue trades. Robinhood added more than 3 million new accounts in the first four months of 2020 and also saw millions of DARTs, according to data provided by Robinhood.
Yet a number of market experts approach this version of the story with skepticism. Yes, there are people with some spare cash playing games with money. There are also some new investors taking advantage of the previously inaccessible opportunity to borrow capital for their trading, which can land them in serious debt. Earlier this year, a 20-year old Robinhood user died by suicide after appearing to believe he had accumulated hundreds of thousands of dollars of debt, though it is impossible attribute any one cause to this tragedy. Those are both problems worth criticism, they said, especially of the platforms doing little to stop it from happening.
But less-gamified platforms like those from Schwab, Betterment and Stash have also experienced similar year-over-year growth in terms of new accounts and trades, and these new users are not engaging in typical day-trading behavior. When taken alongside the day-trading data and new fascination with algorithmic trading, they instead illustrate a bigger picture of a broad swath of the American populace interested in investing for the first time.
Before the pandemic, Wall Street leaders had been vocal about their fear that millennials weren't interested in understanding and investing in the markets, which could be a long-term problem for financial institutions and individual wealth accumulation, JJ Kinahan, TD Ameritrade's chief market strategist, told Protocol. And then the pandemic hit, and "what was Wall Street's reaction? They are idiots, they're not doing it right, they shouldn't be here," he said.
"Are some people just going out and making bad decisions? Absolutely," he agreed. He said he fears, however, that there's a part of the story people are ignoring: The industry wants people to invest, and they want people to get educated while they do it. And the data shows that's starting to happen in a big way.
Algorithmic trading: Unusual lessons, but an education nonetheless
Amid all the furor over day trading, newly serious algorithmic traders have been especially focused on teaching themselves. Though it might not exactly be the traditional investing, or education, that people like Kinahan had in mind.
Chris Stampar, who works with international development nonprofits and designs websites, was already working from home full time in March, so he decided to teach himself Python when he found some extra time during the shelter-in-place. Basic Python turned to portfolio optimization techniques, which turned to algorithmic trading, and suddenly it was way more than a quarantine hobby. "I've enjoyed the coding so much and realizing how incredibly powerful it is, I have incorporated it into my day-to-day investing," Stampar said.
Cabral, the futures trading Facebook group co-founder, has been tinkering with his own algorithm for more than a year. "The wife is pissed at me about it, saying, 'You've been testing this enough, it's time to go live.'" But he refuses to deploy the model until it has seen enough testing to make him absolutely confident.
"Tons and tons of people do it," said Evan Francis, the CEO and co-founder of cryptocurrency trading platform Coygo, where the majority of users are millennial men and many newer, "tech-adjacent" users don't have professional trading backgrounds. "Tons and tons of people also give up algorithmic trading after a year or so," he added. "The average Joe is not going to have a lot of success, but it really depends on the individual."
The inherent difficulty of the modeling and math skills required for algorithmic trading lends well to those who already have programming experience and are actually interested in educating themselves. Brownsword, after an Achilles surgery right before the lockdown began, printed out hundreds of pages on designing a trading algorithm with R (a computer language that's mostly used for statistics) and studied them for months.
And Stampar is part of the growing group of algorithmic traders on Reddit, where he found the educational resources and community that he needed for his projects. Many of the new traders on the r/algotrading subreddit shared stories with Protocol that are nearly identical to Stampar and Brownsword's. They work for big tech companies, as software engineers at major banks and investment firms, in data analytics and social science research and even in nuclear engineering — and they all have taken pandemic time to up their algorithmic game.
Writing trading programs remains niche in the grand scheme of investing because it takes a very specialized mathematical mind to be successful, Kinahan said. "But maybe it is a trend we'll see more and more of, particularly as some of the technology improves."
Years of research indicates that most retail investors, day traders and algorithmic traders do not succeed in making long-term profits, as every expert Protocol spoke with pointed out. And many new investors do not understand that this kind of trading is not about evaluating a company's prospects, but instead examining your own tolerance with risk and how you manage it to make money. "If they're just taking some cash and playing around, they could lose it all. But the lesson may be worth it," said Bradford Cornell, an economist and valuation expert at the Berkeley Research Group.
It's the lesson that's the key. "We think it's a great thing that more and more people are getting invested. At the same time, it's not just a game. How do you make sure people are informed and educated? It's got to be both," Michael Cianfrocca, a spokesperson for Charles Schwab, said. Even if they don't make much money, algorithmic traders are learning a lot by doing.
Creating access to financial markets is important for the long-term success of the banking industry, but it's also essential for wealth development to protect people in times of crisis, argued Brandon Krieg, the co-founder and CEO of Stash, a consumer banking and investment fintech. The pandemic reminded the world that even one financial disaster (especially one only 12 years after the last one) can be crushing for most of the population, a reality he kept in mind when designing Stash. The platform doesn't allow traditional day trading in order to encourage users to focus on the savings and investments they can control.
Because day trading is about risk management, Krieg explained that even people who do it for a living have a difficult time doing it well. "I've seen this movie before," he said.
And that's a concern the entire industry is trying to address. "What we're trying to do right now is find ways to make investing and trading sort of as accessible as possible, but at the same time giving it the necessary … seriousness. Making sure people can be as informed and educated as possible," Cianfrocca said.
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