How Robinhood helped day traders become a force in US markets – Wall Street Journal

Retail investors in the United States have become a powerful force with a boom in day trading, accompanying the Covid-19 pandemic, which requires us to self-isolate and many to work from home. A tripling in the Tesla share price, for instance, has been ascribed directly to the day trading phenomenon, and it now accounts for 20 percent of all American stock trades. Here's the inside story from our partners at the Wall Street Journal, Charlie Turner and Michael Wursthorn. – Alec Hogg.___STEADY_PAYWALL___.The pandemic lockdowns have left many Americans stuck at home with nothing to do so millions of them are sitting in front of their computers or pulling out their phones and trading stocks. It's called day trading, and it hasn't been this popular in a long time. Our markets reporter, Mike Wursthorn is here to tell us all about it. First, Mike, tell us exactly what day trading is..Day trading is a more aggressive form of investing where those people are trading in and out of stocks on a daily basis. They're not holding anything long term and flies in the face of the principles that Warren Buffett, Jack Bogle and other investing titans have encouraged investors to do over the years, just for the simple fact that longer term investing tends to show better returns vs. investing in and out of stocks on a more frequent basis. You know, all that said, investors are keenly fixated on sort of the quick money grab that they may be able to take advantage of with the market conditions right now..And how popular is day trading now?.So there's a few different ways to look at this. But one of the ways is a really interesting data point that Citadel Securities, it's a market maker and it handles about 40 percent of all market orders on a day to day basis – they're seeing that this year so far retail investors, so that it would include day traders and just any other individuals that are trading right now, they're taking up about 20 percent of overall market activity throughout 2020 this year. That compares to fifteen percent at the end of December 2019 and an historical average of around 10 percent. Now, on some of the really busy days that the market as seen so far, such as in March and there's been a number of busy days in April, May and June, that activity among retail investors can actually reach 25 percent. And now those are numbers that Citadel told me they've never seen before..So why has day trading become so popular? What's the appeal?.So the foundation for this has been laid over the last several years. The most crucial thing that several people have pointed to, including the investors that are doing this themselves, is that trading is free for the most part. You can buy and sell the stock and not pay a commission at places like Charles Schwab, E-Trade, TD Ameritrade and of course, some of the newer apps that actually started this – Robinhood in this instance. So that alone, the fact that there's the cost of entry into this is zero, that you can just buy and sell stock and whatever you gain, you gain and whatever you lose, you lose you don't have worry about any of the fees. That's been one of the biggest draws.We had this historic end to the longest bull market ever. It happened in very dramatic fashion in the sense that the drop into bear market territory for the S&P 500 was the fastest on record.The second motivating factor is that trading is easier than ever now, you can do it on your phone, just in the same way that in the 90s, the advent of the Internet and the personal computer gave way to the day traders then, mobile phones and the fact that you can just download an app and trade at the click of a button has opened up trading to anybody that has a smartphone in their hands.Also read: Astonishing rise of Sasol share price: David Shapiro shares 'intriguing story'The third point, I would say, is that you're seeing a lot of people trying to take advantage of the volatility. We had this historic end to the longest bull market ever. It happened in very dramatic fashion in the sense that the drop into bear market territory for the S&P 500 was the fastest on record. And the bounce back has been just as extraordinary, with the S&P 500 rising more than 40 percent. So for a lot of investors, that's seen as a really opportunistic time to get into the market. And they have made some good money, at least the ones that I've spoken with during this story..All right. So how do people actually go about getting involved in day trading?.So to be a real day trader, you have to have at least $25,000 in your account. A lot of brokerages have basically a rule – if you have less than $25,000 in your account, you can't execute more than three trades on a certain day I believe. So it to avoid that issue and to be able to trade as much as you want, regardless of the commission scenario, you need to have that $25,000. That's really the only requirement. Beyond that, it's just about doing your own research. A lot of the day traders I spoke with, they're relying on social media. They're relying on on message boards like Reddit and and some of these other ones that are out there. They're relying on chat services like Discord to talk about these trades. So, it's all these Internet-enabled tools, they've all been updated over the last 20 years, just really making day trading accessible to anybody that has the money to do it..So. People can day trade through established platforms like E-Trade. There's one trading app that's especially popular called Robinhood. Tell us about it..A lot of people pointed to Robinhood as being the real catalyst for a lot of this happening. When Robinhood came on the scene in 2012, they introduced a platform that didn't charge commissions. They made it possible for anybody who was willing, who is 18 or older and could open an account, to trade. They can buy and sell stocks all at the click of a button. And Robinhood did something also very novel in the sense that anybody who joined got a free stock. So Robinhood has seen an explosion in growth – there are 30 million users since their founding and they gained just three million of those in the first three months of this year. And it's a real testament to the fact that Robin Hood has made an app that a lot of people describe as really easy to use, slick, informative and and better than what some of the competition has put out there so far..OK, so put all this in perspective for us, Mike. How big a factor is day trading in the overall financial markets? Does it have any real impact..So that that that's been an open debate among financial industry right now. As I said earlier, retail investors are taking up about a fifth, as much as a quarter of all market activity on a day-to-day basis. But the debate's really happening around what is the overall impact that these investors are having. You're seeing on the margin, say, some impact across the broader market. But for the most part, people believe that institutional money is still driving the S&P 500.But that's not to say we're not seeing big swings in individual stocks just based on retail participation. Companies like Hertz, Nikola, Tesla too, for instance, a lot of those huge gains that they've seen over the last several months of this year have really been at the hands of retail investors. So, while the jury's still out on whether or not they're driving the overall market action beyond the peripheral gains that we've seen over these last several months, it's really clear that they're driving big volatile price swings in individual stocks right now. And that's something that's going to likely continue for as long as this environment persists..Can you talk about the risks of day trading? Give us an idea of how much money can be won or lost..Well, so that gets us into when people do some more sophisticated trading strategies. So when you buy and sell stock, say you buy stock for $30, the chances of that stock going to zero pretty fast is very small. I mean, that stock can lose a little bit of money, but you're still going to have some money of what you originally invested. Where we've seen some of these traders get into a lot of trouble is when they're investing in some highly risky stocks like Hertz, for example… that was a company that was going through a bankruptcy process and you saw the stock going up in some instances, double digit percentage points only to fall back down again. And, a lot of these bankruptcy situations, those stocks get rendered down to zero. So that that's been a big risk for investors as they look at these opportunities to try to get some big gains. But we've seen even more issues with options trading.Now, you know, Robinhood has also been sort of a forerunner in the sense that they made options a lot more accessible to average investors than ever before. So the more simple options… trading strategies where you're just buying, a contract in some cases, in terms of putting a call on a company… that's relatively safe. Where people do more sophisticated strategies like these multi spreads where you can lose more than you put in – that's where we've seen, in at least one case, a very tragic circumstance arise where a trader thought he was down, three quarters of a million dollars because he didn't really understand how the options trade worked. And because of that, he ended up taking his own life. That's an extreme example. But there's been a number of instances where people didn't understand the options trades they were making and ended up suffering substantial losses because of that. In a market like this with how fast things are moving, they're seeing that also in some individual stock prices, too..How long can we expect de trading's popularity to last? Given the current environment of people feeling isolated and the volatility in the markets..The Citadel Securities executive, I think, explains this really well. He thinks that you're going to see some of this persist, but likely not all of this new activity persist. So the bump to 15 percent at the end of 2019 in terms of retail trading activity, that followed Schwab and other brokerages cutting their commissions down to zero. So, Citadel and other industry brokerage industry experts believe that you'll continue to see an elevated level than the historical average of 10 percent just because commissions do not exist any more.But whether or not it remains at 20 or 25 percent of those busiest days will likely rest on the fact that however long this volatility persists, however long we're in this uncertain economic environment where people feel they can trade on these opportunistic price swings in individual stocks. So that could be for the next several months or even longer, depending on how that outlook persists. But for the most part, I think most people believe that you're going to see a higher level of retail participation than you have seen over the last several years.

How Robinhood helped day traders become a force in US markets – Wall Street Journal

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