When you are given just enough rope to hang yourself
The democratisation of financial markets has been a feature throughout my entire career so far. The goal has always seemed to be to enable the average joe to access markets cheaper and faster than ever before.
Spreads have narrowed, brokerage commissions are rapidly becoming non-existent, expensive mutual funds have become cheap ETF’s and you can access a significant number of “investment opportunities” from the lightweight supercomputer you carry around in your pocket.
Main street have been given the rope to hang themselves, and hang themselves they will.
Technology is so good nowadays that the only thing that separates a newbie trader from an old grizzly bear of a trader is knowledge. That knowledge gap that exists is why some old timers are under-performing this year versus reading stories of reddit traders riding bull runs and killing it in the options market.
I previously wrote here about the sudden extreme retail participation in the markets likely as a cure to boredom from lock-down measures over the summer.
Riding the extreme machinations of a late stage bull run has proved very successful for some - and only blind enthusiasm and a lack of experience has kept them in it. but just because you can dunk doesn’t mean you can dunk on LeBron. Aside from his obvious freak athlete status LeBron has learnt his craft over may years of relentless practise. Its hard to imagine that at one point LeBron didn’t know how to play basketball at all. If you were however to square up against him today its extremely unrealistic you would score a single point if he didn’t want you to.
So why do retail traders think they can step onto the court with seasoned professional investors, traders, hedge funds and anyone else who has spent too much of their life staring at the screens. How do they think armed with their mobile phones and a smile they are going to outwit the markets when so many have gone to their graves before them.
Retail’s surprise factor has come and gone now- and just like LeBron would do what he likes to you all over the basketball court so too will the seasoned market professionals push you out of their house and try and take every last penny you have put into a trading account before they do so.
The first in line to do this is already likely having an absolute field day. Admittedly its likely they got a little caught off guard at the early stages but market makers and especially option market makers must be absolutely skipping into work no matter where their office is based at the moment. An army of ill educated retail traders are foaming at the mouth to buy short dated options- people that have never heard of gamma, theta or delta for that matter are happily paying the screen price on their Robinhood app who has sold the flow to the electronic liquidity providers - literally served on a platter for them.
Its likely to be the biggest finesse we have witnessed in sometime - at least in previous regimes when the retail army gained in significance most of them had the good grace to lose their money slowly through cash equity based trades that didn’t pan out over weeks, months or years- now in true 2020 style the retail army are going to learn some hard hard lessons - the same words I heard myself say when I first dabbled in options “how could I lose money on this trade when I was right” I naively asked the options trader nearby - “ the greeks” he said - and he didn’t mean Yanis Varoufakis.
Very few experienced traders would have felt comfortable riding the Nasdaq like an electronic bull for the last few months and likely avoided it like the plague (which in truth is also a very expensive endeavour) but it doesn’t lead to you hanging yourself.
I don’t mean any of this in a nasty way - I think its great that people can invest in stock markets - that is what they are there for. The more diverse the investor base are the better, as it does not lead to the market being controlled by one particular style - if anything I want to see more of them.
But having being humbled by the markets on more than one occasion over the last 15 years I know how this pans out- you cant dunk on LeBron and get away with it. When you are playing in the big leagues you best come prepared cause if not, its a question of when and not if, it will chew you up and spit you out like you were never there to begin with.