Why is this interesting? - The Market Design Edition

On Robinhood, retail investors, and the rules of games

Noah here. A few weeks ago the FT and others had a story about how lockdowns have forced sports-bettors to find other ways to spend their time and money, most notably the stock market.

The lockdowns that have kept billions of people indoors have halted the world’s biggest sporting events — from US basketball and hockey to European football, Indian cricket and even the summer Olympic Games in Tokyo. 

But brokerages that connect everyday investors to the stock market have seen a surge in account openings, as punters seek thrills in unfamiliar places. This has brought new investors to the market, helping to propel a one-third rise in US stocks from the depths of the pandemic sell-off in March. 

“People are staying at home, there’s no sports on — so people are trading for fun with the backdrop of improving markets,” said Rich Repetto, senior research analyst at Sandler O’Neill in New York.

Matt Levine, who’s excellent Money Stuff email we’ve recommended a number of times in the past, calls this the “boredom market hypothesis”.

The question, of course, is now that sports are (maybe) returning, will all these folks exit the market? Joe Weisenthal, who writes the excellent Five Things To Start Your Day email for Bloomberg, Tweeted his answer last Tuesday: “To the extent that the stock market has attracted people who might otherwise be betting on sports, why would they go back? The stock market is better, in part because depending on your approach, it's not as zero sum.”

Why is this interesting?

The topic of retail investors has been covered extensively in the past few months as folks try to come to grips with a market and an economy that are seemingly at odds. Things came to a head last week as Hertz filed a motion to sell equity while bankrupt, as covered extremely well by Matt Levine (and Alex Danco). The gist is that lots of individuals on Robinhood, etc. were trading Hertz stock, thereby raising the price, so the company decided to try to sell them some stock of their own (instead of having them trade it between each other) to see if it can help them through bankruptcy. It’s a crazy gambit and fairly reliant on the “boredom market hypothesis” being true. As Levine outlines, “[Robinhood traders] seem to be bidding up Hertz’s stock because it is fun, because it’s trending on Robinhood, because they are gamblers, not because they have a reasoned expectation of recovering anything for their shares in the bankruptcy.” In other words, they’re just doing it for the lulz.

Beyond the absurdity of this particular story, I’ve been fascinated for some time by the design of Robinhood. While most conversations around the app are focused on how they pushed the market to do away with commissions, my own interest has been about how they make trading stocks feel like a game. For example, here’s E*TRADE’s option-trading interface: 

And here’s how it looks on Robinhood:

The former makes options look like a very serious thing you can lose a lot of money on, while the latter resembles rating a YouTube video. I’m not sure that I have a problem with that, but it seems clear that some part of what makes Robinhood Robinhood is that they sanded away edges of investing in ways other brokerages either didn’t feel comfortable or didn’t think mattered. Here’s Matt Levine again from November:

Robinhood Markets Inc. is a discount brokerage that allows customers to trade stocks and options, with zero commissions, on their phones. … But you can also analyze Robinhood as a mobile gaming company. It makes an app that you can download to your phone, and then you can play a game on the app. As with many mobile games, there are in-app purchases, and you can end up spending a lot of money on the Robinhood game. The game is of course a stock-trading game. The purchases are stocks. You win by getting a lot of money. But there are other ways to play. Some people aren’t interested in playing the game as its designers intended. They want to hack the game, to find weird glitches and exploits, to take the game apart and build their own weird levels, to stream the resulting monstrosities to entertain their friends.

And so while we’re all trying to unwrap just what is happening in the markets and the role retail investors play, it seems that we should look beyond Davey Day Trader, and r/wallstreetbets, and even just the fact of Robinhood’s existence, and think about the ways design choices can fundamentally alter the mechanics of a game for which many thought they knew the rules. (NRB)

Podcast of the Day:

Following their in-depth retelling of the Apollo 11 mission, the BBC follows up with a similar treatment for Apollo 13. According to Esquire’s writeup, “[the podcast] tells its story with the same mixture of original interviews and archive from key figures, including mission commander Jim Lovell. The drama of an exploding oxygen tank and the desperate race to get all three astronauts back to Earth alive, from 200,000 miles away, is obvious. But the real intrigue comes in the podcast's exploration of all the other forgotten obstacles and calamities to overcome on the way.” (CJN

Quick links:

Thanks for reading,

Noah (NRB) & Colin (CJN) 

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