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Trading apps reduce markets to one game

Retail updates

What social networks have done to society, they are now doing to the markets.

Notice the similarities between last January’s riots in the U.S. Capitol and the capital riots on trading platforms like Robinhood, which goes public this week. Just as Washington was stormed by Trump supporters organizing a flash mob online, the new high-speed trading platforms have allowed retail “brothers” to team up in a multiplayer game that can only be pumped and dumped can denote various “meme” stocks and cryptocurrencies.

The bloodshed of the riot made it a much more serious event. But in both cases those involved were driven by a feeling of being somehow manipulated or undermined by a system beyond their control. By using digital networks to organize, they could strike back in some way – be it by terrorizing members of Congress or by offering GameStop to harm some hedge funds.

We understand the threat to democracy posed by platform technology. But the dangers for our financial system were less talked about when “likes” become “purchases”.

Some people, including the founders of Robinhood, claim that the online broker is “democratizing” funding by allowing beginners to bet on anything from stocks to complicated derivatives in a split second, just like the pros do. But this connects the idea of ​​the voice with that of making a profit.

I would argue that high-speed trading platforms designed to attract the weakest of beginners (the average age of 18 million users is 31 and the average account balance is $ 240) are simply a new and more nefarious type of surveillance capitalism.

First, consider the asymmetry of power. We have no idea of ​​the real value of the personal data sold to advertisers by platform giants like Facebook or YouTube as a hidden fee for the supposedly “free” services we enjoy online. Similarly, Robinhood users have no idea that the reason they and their retail counterparts can trade “for free” online is because their order streams are shared with bigger, richer fish.

Meanwhile, digital nudges developed by behavioral scientists whose job it is to create the most addicting interfaces make them act as much as possible and as fast as possible. Just as digital “loot boxes” get kids to play online video games and, in some cases, spend real money on things within the game, the nods to trading platforms – push notifications, happy reward icons, hot stock lists and the like – are about to get the endorphins going and the money will flow. Nobody receives any special reward for buying and holding an asset. Is it surprising that Robinhood’s growth is being led by trading complex and speculative assets such as options and NFTs?

More trading, of course, means more losses for individuals. But even for those who aren’t into this type of gamified trading, there is a downside – bizarre market volatility, driven in part by this new crop of petty speculators (think not just of the “investing” meme, but the Role of the retail platform traders in the case of large commodity price fluctuations in the past year).

It can be argued that it is unfair to stop the little guy from doing what the pros do. But there are also widespread questions about the social value of high-speed trade. “It’s all so wasteful,” says Hilary J Allen, a professor at Washington College of Law who specializes in fintech regulation. Not just gamified trading, but “the idea that we could drill holes through mountains to run fiber optics to cut someone a millisecond of trading. I mean come on! “

All of this underscores how far our market system is from its original goal of mediating between savers and borrowers by channeling money to where it is most productive. Investment apps like Robinhood are the opposite of that. They are not interested in real investments, let alone the financial system. You turned the system into a game yourself.

Technology has made markets faster, but arguably not better. It certainly didn’t make them cheaper. As scholars like Thomas Philippon have shown, none of the many technological “innovations” in financial markets since 1880 has actually reduced the cost of financial intermediation. Someone makes as much money as ever. Fintech just makes it harder to identify who.

How can you fix things? It is possible that Robinhood will fall prey to its own success. The company offers users at least 20 percent of the IPO shares, but knows what the flash mob will do with it in the long term.

The Securities and Exchange Commission, which has already fined the company for various offenses, should force platforms like Robinhood to clarify what “free” trading really means. How and to whom are user data passed on? The same should of course apply to any broker. Regulators should also apply existing anti-fraud and tampering rules to subreddit forums often used by retailers online (chat rooms are already being monitored).

I also think it is time to resume the discussion on the design of a US financial transaction tax, which is already in use in some European countries. All proceeds could be used to strengthen the digital capacity of regulators. You will need it.

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