Updated: Mar 13
While a crisis tends to appear in our markets once a decade, I believe this recent conflict between Robinhood & WallStreetBets is unique. Never before have the battle lines between retail investors and market professionals been drawn more deeply than they are now.
Thus, it’s understandable yet troubling that there is a lot of rancor on social media about this. While some of it is clearly crass or misinformed or both, it’s important for us all to listen. That being said, most of the war being waged between powerful people on Twitter, Reddit, or Twitch seems to be talking past most of the investing public.
For there to be long-lasting good to come out of this event, we need to focus more on building the bridge between Main Street and Wall Street.
I should know. I am in the middle of this disconnect. I’ve spent decades in the financial world as an institutional market maker, portfolio manager, and most of all a trader. I’ve built a high-frequency trading platform, run an algorithmic hedge fund and most recently taken what I’ve learned from those experiences and started an online brokerage to empower retail investors, All of Us Financial.
There is no historical precedent to help us understand what happened this week, but there is a way to project forward and make informed guesses. If you study social platforms and network effects and how they affect markets, you can start to draw some conclusions and learn some lessons.
Let me be clear: What just happened with the blocking of retail buying of stocks by Robinhood and others is highly questionable, to say the least.
I’m extremely troubled by what we witnessed.
Some of my friends who have worked in the securities industry for a long time focus on the “way things work” and this is somewhat valid. They argue the reason the firms stopped taking buy orders on these selected securities was to manage their daily cash and volatility requirements. Trading may be free now but the business has regulatory obligations and they have financial limits -- so just lock it down.
There are numerous problems with this approach, but none has come to bear more clearly than the lack of trust. You can see it in the allegations that various market makers and hedge funds have been unfairly bailed out by other financial institutions, which more than raise an eyebrow, they shake the very foundation of what has been the golden era for retail investors.
This is important because retail traders have never had it better than today -- easy, direct, fast access, miniscule bid-ask spreads and zero commissions (negative for AoU) showcase the opportunity that never existed before for retail traders. The market, for the most part, is not rigged. It would be a shame for this silly conflict to jeopardize all this progress.
We should be patient and listen and figure out how to fix the problems. Those of us that are part of the system, work for “the man” or at least are perceived to, need to be graceful, grateful and honest about whether what we are doing is the best it can be.
That’s not happening at the moment, in my opinion, in so many ways.
There’s going to be a lot of pressure for policy-makers to do something. Regulatory solutions should be data-driven and targeted so as not to screw up our markets. Most of the solutions should come from the private sector.
In trying to think of a path forward beyond unfair inequitable buy blocks, I think about “how we got here.” Ultimately, I think there was a growing swell that had been building for years, and the levee finally broke last week. I think that if Main Street and Wall Street were to build 3 better bridges in the months to come the system becomes more fair and equitable -- a market that can prosper for years to come.
Transparency -- It has to be easy to see where the money and interests lie in total and easy-to-understand terms. It cannot be difficult, nor a privilege, to see how institutions are profiting and transacting in the financial markets.
Investor Alignment -- Incentive structures must be realigned to enable true win-win transactions and agnostic as to who is on the other end of the trade.
Learning Data -- While entertaining at times, twitter and reddit are highly inefficient ways to distribute and interpret a community’s investment data. In todays’ technological environment, there ought to be a way to utilize a rich community data set of actual trading data, managed by transparent handling and shared economics.
This is what we are trying to build at All of Us. Will we succeed? Hard to say. We are a very small voice in a massive conversation, but I can assure anyone reading this we take these principles very seriously and they guide how we are building the company.
You can already see radical transparency on our platform – how much revenue we make on you, how much we share with you, how many customers we have, how many assets are on our platform, how much in returns our members collectively have achieved, where you stand relative to others (if you opt-in of course), and on and on. In fact, you can already see we share each revenue stream with you.
No one else does this stuff. Perhaps most importantly, we are putting our money where our mouth is. Case in point, check out our Sharpeshooter Challenge, where we are offering up to $10K to the investor with the best Sharpe ratio every month.
In addition, we are starting to look at Learning Data. It’s just the beginning and we are barely at infancy in pushing ahead here, but everything we build going forward will give our clients more products, more information, and more revenue streams. Not just from their assets, but their data and their time-and-effort. Never been done before! And super hard to get the data science right – the machine learning, artificial intelligence, and so on. But our founding team has done these things successfully in other areas of finance and now they are doing it for you and for as many millions of customers as we can in the future.