There's a speculative boom
I've seen an endless amount of articles and posts about the effects of COVID-19 on the economy and businesses. Some of the most-interesting angles are about how long-term changes in the economy -- like telecommuting -- will be accelerated by the pandemic.
However for market participants, the biggest change might be the explosion in no-cost trading. I joked at the start of the rout in oil about the sudden spike in interest in trading oil from people who had no idea how the market worked.
"What are all the tourists who would be in Paris and New York doing? Evidently they're trading oil," I wrote.
With the implosion of USO in the days that followed, it became clear that unsophisticated retail investors were a major factor, bigger than I ever imagined they could be. At one point they held 30% of the front-month contract in oil and had no idea what they were doing. I suggested shorting USO and it was cut in half two weeks.
What's concerning is that the trend is accelerating. The WSJ reports:
'TD Ameritrade said last week that retail clients opened a record 608,000 new funded accounts in the quarter ended March 31, with more than two-thirds of those opened in March. E*Trade saw a net gain of 363,000 accounts in the quarter-a company record-around 90% of which were retail. Charles Schwab Corp. reported a record 609,000 new brokerage accounts in the quarter, including individuals' self-directed accounts and those managed by financial advisers.'
Online trading is exploding and the absence of any trading fees have changed speculative behaviour. No doubt this is a continuation of the long-term declines in trading costs but the arrival at zero has altered the holding period for investors from short-term to almost no term. While $5/trade or $0/trade really shouldn't change behaviour, you can see from this chart that it's been a revelation.
Compounding the change in market structure are increases in leverage and cheap borrowing costs and the explosion in the options market, which coincides with the shift to weekly options from monthlies.
Add it all up and you have the perfect storm:
- Increased financial market volatility
- No cost trading
- Cheap leverage
- Better options market access/liquidity
- Smartphone trading
On top of that you have growing communities like Wall Street Bets on Reddit that glorify reckless risk taking. So you probably have a cultural shift going on in investing as well.
Investor Amnesia has a great, closer look at the history of bubbles in speculation itself.
Over and over, the story is the same:
Their results show that these speculative margin loan holders largely follow the herd by buying at the top, and selling out at the bottom.
That's something we've seen countless times here. The irony of Robinhood is that it's ultimately going to steal from the poor and give to rich, sophisticate investors.
It's clear to me that one of the great trading styles -- perhaps the great style -- in the months ahead will be to simply sell whatever retail is piling into at the moment. For that, there are some great, emerging tools and one of them I'm looking at closely is Robintrack, which shows popularity changes over different periods (down to 1 hour).
If anyone knows about similar tools, analysis and other ways to view the data, I would love to hear about them in the comments because I think this is a bonanza.
