The Trolls of Wall Street: How tech-savvy retail traders changed markets

The Trolls of Wall Street:  How the outcasts and insurgents are hacking the markets

Author: Nathaniel Popper

Publisher: Harper Collins

Pages: 342 

Price: Rs 599

This well-written, well-researched book chronicles the entry of droves of new, tech-savvy, retail traders into financial markets over the past few years, and how that has changed the trading landscape. Though it is US-centric, readers will note resonances with India and other large markets.

Nathaniel  Popper delves into the sociological underpinnings of this shift in trading dynamics, which started well before the pandemic but accelerated dramatically through the lockdown period. The focus is on the huge groups of retail traders who discuss trades on Reddit, Internet Relay Chat (IRC), and Discord game servers.

These traders take massive crowd-sourced positions in “meme stocks” — the stocks that they fancy, research, and turn into memes. Their trades have supercharged the prices of AMD, Tesla, Hertz, American Airlines and GameStop, and bankrupted multiple hedge funds who have taken the opposite side.

The subreddit WallStreetBets (WSB or https://www.reddit.com/r/wallstree tbets/) which Mr Popper investigated in detail has over two million active members, and logs over 200 million posts a month. In a perfect illustration of how feedback loops work, Reddit traffic drives, and is in turn driven by, trading activity. As the pandemic took hold, billions were forced into isolation and deprived of their usual hobbies. Many of them started playing the markets. The retail trading population exploded. This cohort of retail traders has a mindset very different from previous generations. Members of this (overwhelmingly male) group are young and single  — often self-declared “incels” with no friends. Many are not well-heeled, though some have made millions. Discount brokerages like Robinhood and Charles Schwab ceased to charge brokerage fees and started offering easy leverage eight to 10 years ago. This vastly increased access to trading. Many Robinhood trading accounts start with a corpus of $100-200. Of course, since the business model depends totally on order-flow, the brokers encourage users to trade as often as possible.  These traders live online 24x7, and are comfortable interacting anonymously with strangers. Many are good at arcane online research and statistical analysis, having honed their techniques by selecting fantasy teams in NBA, US football, Major League Baseball and IPL. It is possible to translate such skills to financial research. There’s a fair sprinkling of maths and physics majors, data-scientists, equity analysts, and experienced traders in these groups .

As committed video-gamers, they approach trading in the same spirit of seeking a dopamine rush. They equate loss on a trade with money spent on a video-game. They are anarchic in attitude, distrust formal governance systems, and casually sprinkle posts with racist and misogynist commentary, obscene tropes and memes, interlaced with research and technical advice. Some of them were vocal Trump supporters, who did not, however, bother to vote in 2016 or 2020. WSB users have trolled hedge fund managers mercilessly, including offline harassment.  They refer to themselves as “Degenerates”, and “Apes”. When they lose money, they receive sympathy from the group. When they make money, everyone celebrates.

The collective and individual risk appetite is insane — YOLO (You Only Live Once) trades are popular. When the WSB crowd piles into stocks, cryptocurrencies and derivatives, they put hundreds of millions, and sometimes billions on the table in highly leveraged trades. That flood of crowd-sourced money can overwhelm “professionals”— the hedge funds taking the other side. As the book points out, WSB research is also solid.  The domain expertise and industry understanding of the WSB traders exceeded that of Wall Street. The WSB “degenerates” have even been right in terms of their timing of the broad market on several occasions — something retail traders have never managed in the past.

WSB seems to specialise in triggering Gamma Squeezes, when WSB groups take call positions in stock options, and force hedge funds to incur billion dollar losses to cover shorts. WSB also features deep balance sheet analysis, and detailed market intelligence of high quality. For example, WSB traders backed Tesla from its very first profit-making quarter, and figured out before Wall Street that GameStop was headed for a takeover battle.

Many individual WSB members have been wiped out. But as a group, WSB has been right often enough to make it count. Quite a few WSB users are genuinely gifted traders who don’t mind sharing insights since it doesn’t hurt if 50,000 traders mirror their positions in bro-solidarity.  The “dumb money” also ceases to be dumb when it tracks smart traders. Ironically, WSB, which is all about making money, is trusted by users, because no WSB user has successfully monetised WSB, although Reddit has raised plenty of money on the back of the traffic volume. Mr Popper (in passing, I wonder if he’s related to the great philosopher, Sir Karl Popper who is one of George Soros’ heroes) looked closely at the lives of two of the WSB founders. Neither has made much from running the group. One of them is now involved in a lawsuit trying to take the WSB name and trademark from Reddit, while the other has struggled to meet mortgage payments.  

In sum, this book provides a fair degree of insight into a new breed of traders, who treat financial markets like any other video-game and crowd-source insights. It is a community entirely unconcerned about political correctness and is often deliberately nasty, simply because nasty can be entertaining. It has forced finance professionals to re-evaluate trading strategies.