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Pump and dump: amateur traders risking more than just money

By Lachlan Deveridge

Published 23 October 2020 | Estimated read time: 15 minutes

Since the start of the pandemic, tens of thousands of home-bound Australians have taken their chances at trading shares. Although some have made significant gains, many have lost large portions of their savings.

 

Luke Harris started investing his savings at the start of the pandemic as a way of supplementing his income after graduating university.

“I graduated at the start of the pandemic without a job lined up. The job market looked bleak at the time, so I had to find other ways of making money,” he said.

 

“I was tutoring a few kids every other day before the pandemic hit but as soon as the lockdowns started everything dried up.”

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Luke Harris (Photo: Lachlan Deveridge)

Mr Harris, 24, who currently teaches maths at Mosman High School said he stumbled across the online community r/ASX_bets while scrolling through Reddit.

 

“It started off as something I checked every now and then. I would go back and forth between my share trading app and Reddit to see what shares had gone up.”

 

The Reddit community r/asx_bets was launched at the start of 2020 and has now grown to over 20,000 users. The community mirrors the US equivalent, r/wallstreetbets, which, together with the zero-cost trading platform Robinhood, has become a dominant force in the sharemarket. 

“If I see in the news that a certain company is making an announcement, I can buy into that share before they’ve even finished their press conference. It’s incredibly quick and easy.”

Luke Harris

“When I was a kid, I remember my dad having to call up his accountant, who would then call up his stockbroker, whenever he wanted to buy or sell a share. It seemed almost painful.” 

The tentacles of retail trading have now reached all corners of the market. According to Bloomberg Intelligence, retail investors make up 1 in 5 of all equity trades on the market. This is up from 1 in 7 in 2019.   

As high-interest saving accounts have been paying record low returns and working from home has become the new normal, amateur traders have now become a permanent fixture in the markets globally. 

The increased volatility in the markets mixed with a lack of understanding of market fundamentals is a toxic cocktail for amateur traders. Traders have mainly ignored these warnings; instead, they are becoming caught up in the hype of making quick gains.

“As I tell my students at school, there is no such thing as free lunch in this world.

“I was unlucky as I didn’t see the warning signs when I became emotional with my money. I ended up losing $600 all up.”

 

Bets, memes and hype 

Young investors have become infamous in 2020. As the markets rallied following their sharp decline at the start of the pandemic, punters have flocked to day trading in droves hoping to make a quick buck. 

However, millennials haven’t been trading in the same way that their parents previously traded shares in the past.

This is due to rapid changes in technology which have radically shifted how the retail trading market globally. 

Fintech startups have moved swiftly to capitalise on the increase in younger traders. In Australia, the online trading platform Superhero launched in September and has registered a new user every 20 seconds during their first month. 

The platform undercuts the traditionally high brokerage fees charged by the banks to make ‘investing accessible, understandable and affordable.’

 

As younger generations line up to invest in the stock market, the Australian Securities Exchange (ASX) has uncovered that many are under the influence of social media influencers who are promoting risky investment strategies and sharing misinformation about individual shares. 

 

The 2020 ASX Australian Investor Study has found that 18 per cent of younger traders attribute social media as their primary source of information on the markets, compared to just 3 per cent of retirees. Meanwhile, 17 per cent of young traders chose online forums and blogs as their primary source of information.

The data raises concerns for the quality of information absorbed by amateur investors from social media and how it ultimately affects their decisions on the market. 

 

A study of experienced investors by U.S. brokerage firm E*TRADE has found that more than half of investors aged 34 years old and younger have increased their risk tolerance since the start of the pandemic. Only 28 per cent of the general population had said the same. 

 

ASX data has also revealed that those who are intending to invest and those who have never invested prefer safe, stable and guaranteed returns. However, this preference shifts as they begin trading on the market. 

(Source: 2020 ASX Investor Study)

It becomes clear as you scroll through pages of memes, bets and crude behaviour on r/ASX_bets that the words safe, stable and guaranteed returns aren’t a part of their vocabulary. 

 

The subreddit is home to some of the most outrageous YOLO bets, which includes meme stocks like buy now pay later companies Zip and Sezzle to bankrupt companies like Virgin Australia before regulators removed it from the market in early April.   

 

Their distaste for responsible investing extends to their ongoing feud with the long-term investing subreddit r/Ausfinance

 

The most recent share to be given the hype treatment from ASX_bets is the artificial intelligence startup Brainchip. Last month, the Australian penny stock experienced an overwhelming rally which saw its gains reach 1500 per cent of its share price at the start of the year. 

(Photo: Wikimedia Commons)

Naturally, the share price has since corrected itself, and to date, it has fallen just over 60 per cent from its peak in September. 

 

Luke Harris followed along as the Brainchip share price rocketed to its peak and wasn’t surprised that the share price corrected itself just as steeply. 

 

“It was insane. There were so many posts on the subreddit that the mods had to create a dedicated mega-post,” he said. 

 

“I’m sure a lot of people from that subreddit became very wealthy after that rally. But I’m certain more people lost just as much, if not more, from trying to time the market.”

Amateur traders in regulator’s sights 

A report from the Australian Securities and Investment Commission, the corporate watchdog tasked with regulating Australian markets, found that there has been a sharp increase in the number of new retail investors trading on the market since the start of the pandemic. 

 

From late February to the start of April, retail traders had opened more than 4600 trading accounts daily. This is more than triple the average of the previous six months. 

 

During the same period, the turnover in funds from retail traders increased from $1.6 billion in an average period to more than $3.3 billion. 

 

“We found that some retail investors are engaging in short term trading strategies unsuccessfully attempting to time price trends,” ASIC said in a statement. 

 

In addition, there has been an increase in trading frequency and an increase in the number of different shares traded per day. Naturally, the length of time that traders hold a share has also fallen. 

(Photo: Lachlan Deveridge)

ASIC warned in its report that, “Even market professionals find it hard to time the market in a turbulent environment, and the risk of significant losses is a regular challenge.”

 

For retail investors to attempt the same is particularly dangerous, and likely to lead to heavy losses – losses that could not happen at a worse time for many families.”

 

Increased day trading has not only harmed the traders risking their savings but has also amplified the market volatility ignited by the pandemic. 

 

Dr Burton Malkiel, professor emeritus of economics at Princeton University, said in a blog that, “these new market participants have very likely contributed to the extreme volatility that has recently characterised stock prices.”

 

Legions of new day traders have poured new money into stocks without a care for the risks involved.”

All-time highs and tragic lows

Professor Alex Blaszczynski (Photo: Supplied)

In June, Alexander Kearns, a 20-year-old from Illinois, died by suicide after he mistakenly believed he had lost $730,000 from trading options on the trading app Robinhood. Although it is unknown if there were any underlying factors which contributed to his death, it is clear that money has a significant toll on mental health, especially in younger generations. 

 

Professor Alex Blaszczynski is the Co-Director of the Gambling Treatment and Research Clinic as well as a Professional Research Fellow at The University of Sydney. He said that trading platforms need to take measures to protect the mental health of traders. 

Professor Blaszczynski recommends that regulators restrict traders from acting impulsively with their investments, by heavily regulating trading platforms. 

Alex Kearns death has uncovered the dark side of online trading and the tactics used by trading platforms to lure amateur traders. Paired with the frenzy surrounding trading found on social media, it is only natural that some have compared trading apps to video games

When asked whether amateur traders should be taking advice from social media when starting to trade in a volatile market, John Winters, Co-Founder and CEO of Superhero, said the following in a comment to Central News.   

 

“When starting your investment journey, it’s important to understand the difference between opportunity and risk,” he said. 

Superhero co-founders John Winters and Wayne Baskin (Photo: Supplied)

Warren Buffet’s number one rule is ‘Don’t lose money’ so new investors should keep a long-term focus and look for companies that will be around for the long run. “At the end of the day, it will be those investments and those companies that will do well.”

As hype and misinformation increasingly circulate on social media, amateur traders should take care to ensure they aren’t influenced and misguided into making a trade they will ultimately regret.

Suppose amateur traders find themselves in a situation where they feel they’ve lost control. In that case, Professor Blaszczynski recommends they seek professional help. 

 

“They should probably go to… specialised gambling counselling services,” he said.  

 

“In 30 years of treating problem gamblers, I think I’ve only come across one case of day trading … but the number of cases that have emerged seeking treatment is very small. It doesn’t mean that the pool of people requiring assistance is larger.”

 

— Lachlan Deveridge @l_deveridge