Inside Robinhood: The stock traders causing havoc on Wall Street

It's never been easier to buy stocks - and some investors are taking strange risks. Photo / Getty Images

The Scrabble bag may have been a step too far.

Earlier this month – sat in front of a sign saying "stocks are easy" – Dave Portnoy explained his investment philosophy.

"You just take a couple letters, you mush 'em together, you press 'buy, buy buy', and you watch it go up, up, up. That's how this works," the sports blogger-turned-investor told his fans.

A few days later, prompted by some gentle ribbing of his claims on CNBC, Portnoy made good on his boast. Ripping open a new box of the tile-based word game, he drew R and T – pointing him towards defence contractor Raytheon.

"Don't know nothing about it," he said. "Two hundred grand, market order – done."

#DDTG: Grab your scrabble tiles and string some letters together. Everything is up a BAZILL. pic.twitter.com/iGyaXB4cs7

— Dave Portnoy (@stoolpresidente) June 16, 2020

Since then, Raytheon shares have fallen about 5pc. While Portnoy's trade may not go down as one of history's great investments, it epitomised a corner of the trading world that has gained increasing attention in recent weeks.

Portnoy – who became an internet celebrity after launching the Barstool Sports blog – has become the doyen of a new breed of day traders. Known as "Robinhood investors", after the commission-free trading platform many use, they have received some blame – fairly and unfairly – for the wild market rally of recent months.

Congregating around online blogs and forums, these traders are marked by spontaneity, aggressive trading, a disdain for investment's sacred cows and a big serving of self-loathing. They focus on individual stocks, and win – or lose – big.

In a research paper exploring the phenomenon, analysts at German insurer Allianz wrote: "These newly baked investors have little prior experience in trading nor a sound understanding of the capital markets. They ignore the fundamentals and seem to be provoked by the FOMO (Fear of Missing Out) phenomenon as well as gambling incentives promoted on [social networks]."

Messaging board Reddit's WallStreetBets community, which has around 1.3m members, offers an insight into many of the group's key predilections: supreme market masochism, bizarre meme-based theories and a unhealthy reverence for its own minor deities: Tesla founder Elon Musk, and US Federal Reserve chair Jerome Powell (variously called J-Pow, JPOW, J Pow Wow and a variety of other names).

It is likely that many of these "new retailers" have done well. Wall Street has soared since March's nadir – the second quarter, which ended on Tuesday, was the best since 1998, with gains driven by the continued rise of America's tech giants.

JP Morgan analysts, led by Nikolaos Panigirtzoglou, say the new retailers have created a "generational split" in the world of retail investment, which represents about 37pc of US total stock ownership, according to the Federal Reserve.

"The older cohorts of the US retail investors' universe tend to invest in equities via equity funds," they wrote in a note to clients. "Instead the newer cohorts including millennials prefer to invest directly in individual equities rather than via equity funds."

That drive towards picking out individual stocks – as opposed to the popular practice of investing in index trackers and other funds – has revealed a breed of company that attracts this new breed of traders: the lost causes.

Barclays' equity strategists, led by Emmanuel Cau, say such investors have become particularly exposed to so-called penny stocks – creating some strange movements along the way.

"It does appear that they are most interested in such stocks in the hope that, given the low absolute share prices, their chances of higher return from such beaten down stocks are high, irrespective of their fundamentals," he writes.

Perhaps the greatest example of this strange philosophy was car rental chain Hertz, which filed for bankruptcy in late May – before seeing its share prices soar as Robinhood investors piled into the group in hope that it would receive a bailout.

The move had the bizarre effect of pumping up Hertz's share value enough that the group's management made a last-ditch attempt to raise funds – before hitting a regulatory wall.

Hertz was not the only company to find itself caught in a retail stampede. As the pandemic forced workers home, foolhardy investors accidentally boosted the shares of Zoom Technologies – an online services group that unfortunately has no connection to Zoom Video Technologies, which owns the popular video conferencing software.

In May, FANGDD Network Group found itself in a similar situation as a slew of Robinhood investors – possibly searching for a basket of FAANG stocks (Facebook, Apple, Amazon, Netflix & Google) – piled into the group, a small China-based real-estate firm.

"Despite being isolated events, one only has to spend some time on popular Reddit communities to get a broad idea of the current market hysteria and the risks that 'new retailers' are taking," say Allianz's analysts.

Beyond these fringe cases, however, it appears unlikely that Robinhood's motley crew have the power to swing the main market. The app's estimated $20bn in client assets under management make it a minnow compared to sector titans such as Charles Schwab.

"While the above-referenced strategies of 'Robinhood' investors appear to have materially impacted a smaller portion of the market, it remains to be seen whether their actions could create ripple effects across the broader equity market," says Cau.

The durability of the phenomenon is also in question: not least because the increase in trading has gone hand-in-hand with a surge in the amount of spare cash held by US households, and a decline in opportunities for sports betting as events closed down.

"The increase in the number of users coincided with the surge in saving rate and cash holdings," Cau continues. "It remains to be seen if this new source of bid to equities will resist the removal of furlough schemes and the subsequent hit to disposable income if unemployment does not fall quickly again."

As for Portnoy, he appears unperturbed by his Raytheon miss. In a video posted to Twitter on Tuesday, he swung a green hammer while yelling "stocks only go up!" – shortly before accidentally hitting himself in the head.

"I've got a wild headache," he said. Some investors may agree.

- Telegraph Media Group