How Trading Apps Transformed Markets

Trading apps have transformed markets. Retail “bros” band together in what can be described as a multiplayer game to pump and dump “meme” stocks and cryptocurrencies. Activist investors have tried to fight back against what they see as manipulated markets. The social internet has evolved from “likes” becoming “buys.”

A meme stock refers to a stock whose price increased on the back of trading volume from retail investors, often spurred by people or groups on social media including Reddit, TikTok, and Twitter. Meme stocks are popular for many reasons, in part related to the pandemic. People had received welfare, in the form of government stimulus, with which to buy meme stocks and crypto. Social media forums allow retail investors to follow trends. The GameStop price had a tremendous increase based on Reddit posts. 

Robinhood founders claim the online brokerage “democratises” finance by allowing novice traders to make split-second bets on stocks, complicated derivatives, cryptocurrencies, and more. These apps induce retail investors to trade as much and as fast as possible via digital nudges—push notifications, happy reward icons, hot stock lists and such like—created by behavioral scientists whose goal is to make trading interfaces addictive and get the endorphins going. Robinhood turned trading into a game. RobinHood and other apps offer “free” trading. However, user data is sold. Therefore, the apps are not free. 

Heretofore, fantasy trading has mostly been in the domain of online brokers as part of a marketing funnel. The fantasy trading is not gamified, and users are constantly nudged to put up real money.  

RobinHood

RobinHood introduced to trading the millennials, who can purchase fractional shares with as little as $1. The apps offer user-friendliness, as the average investor can now win or lose money on the stock market that were only available to institutions, such as pension funds and mutual funds. This “democratization” of stock market investment has clear benefits, however, an educated investor, especially young investors, could end up losing money risking more than they can afford to lose.

Critics suggest the behavior demonstrated on Robinhood generally amounts to not investing, but, rather, gambling; that is, the individuals on Reddit’s r/WSB, for instance, are buying stocks based on rumors and social media posts, not on financial knowledge or analysis. That can be very dangerous, especially if they don’t employ basic investing sense, such as not investing more than they can afford to lose. 

Are RobinHood And Other Apps Harmful?

Trading apps could face regulatory headwinds in coming years. Congress held a hearing in February 2021, called “Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide”,  where they asked Robinhood CEO, Reddit CEO, and a r/WSB trader questions about the gamification of stock investing and the role of social media. 

Committee members mulled whether Robinhood’s goal to “democratize finance” for the public is harmful, suggesting a potential future intent to regulate such apps in a stricter manner. There is evidence of the harmful nature of these trading apps. For instance, Robin Hood is currently being sued by the family of Alex Kearns, a 20-year-old who committed suicided after the app falsely displayed he had $730,000 in trading losses on the app. Committee members asked how Robinhood communicates with users and educates about the market. 

In particular, Democrat lawmakers seemed affable to further regulate these apps, focusing mostly on Robinhood, which was at the heart of the Wall Street Bets fiasco. It halted GameStock purchasing on January 28, and was subsequently accused of market manipulation. 

When one wishes to trade stocks, they must adhere to knowing your customer and anti-money laundering regulations. Traders must upon registration submit tax details, sign forms, transfer money, and wait for money to transfer into the trading account. In a fantasy trading environment, new and old traders alike can test theories without risking capital. Fantasy traders get the emotions tied to watching stocks move up and down as they win or lose tournaments. 

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