"The race is not to the swift, nor the battle to the strong," goes the saying. "But that's the way to bet." When we make bets, we are predicting the future. Today we do one thing instead of another, because we are betting tomorrow one thing will happen and not another. We all do this implicitly, all the time. But those who seek to make money from the bet itself are a different class. They are gamblers. Or investors. Or both -- it's hard to tell and getting harder.
How gambling differs from investing is an old question never resolved. What people call "investing" is robed in scholarly regalia, most of it today of the quant variety. Much of it is phony, but it gives investing a degree of respectability that gambling lacks. Oh, there are plenty of books written on, say, poker and blackjack, and some of them are pretty sophisticated in their own right, but they generally don't have the same academic heft as the Graham and Dodd 1934 classic, Security Analysis, or its 1974 "for dummies" version, The Intelligent Investor. Not that there aren't plenty of books out there about how, in one way or another, "to make a million" on Wall Street. Or, I should say, there used to be books. Now they are just as easily found as YouTube videos and click-bait ads.
I spent a good chunk of my college days playing poker, and those since deeply enmeshed in the financial markets. I've known gamblers and I've known traders, and honestly it's hard to tell them apart. Both do exactly the same thing: they bet money on a future they can only guess at. Maybe the only difference between gamblers and investors is how they think about themselves. See https://wall-street.com/trading-vs-gambling/.
Being a Boomer, my first impression of a casino was wholly unrealistic. I thought casinos looked like Rick's in Casablanca, where Humphrey Bogart held sway in a white dinner jacket.
Or they were places where someone like James Bond casually dealt cards in a tuxedo.
You can imagine, then, the letdown when I first walked into a real casino. But who are we to judge, we who've gone from holding boardroom conferences in three-piece suits to having Zoom meetings in our underwear?
Still, the stately stock exchanges, in their fake Greek temples with their bridge-of-the-Enterprise lights and screens, seemed a world apart from Jersey Shore crowd at the late Trump Taj Mahal. But all that may be changing.
Weird -- but not so much. So-called prediction markets have been around for decades and permit gambling on all kinds of non-sports events. Today, you can bet on the success of movies and entertainers at HSX.com, the Hollywood Stock Exchange. According to its website, "Hollywood Stock Exchange (www.hsx.com) is the world's leading entertainment stock market. At HSX.com, visitors buy and sell virtual shares of and movies with a currency called the Hollywood Dollar." Mission: Impossible 8 is the current hot pick, trading at H$106.70, up 4.8% yesterday. http://www.hsx.com.
For a decade, you could bet on political elections at InTrade.com. The relative "value" of candidates on InTrade gave you a better sense of their election prospects than any conventional poll. InTrade shut down in 2013, done in by laws against illegal gaming -- which is any game that doesn't give the state its vig. But on the horizon is something even better. Augur.net promises a blockchain-enabled betting platform, using the Ethereum blockchain and ether in place of dealers and poker chips. Its developers promise that you can "Bet how much you want, from anywhere in the world, on sports, politics, finance and more." https://www.augur.net/. If you think securities regulators have trouble getting their heads around cryptosecurities, wait till you see state gaming commissions try to regulate cryptocasinos!
But Augur is not yet live, and it's now three months later. Sports still aren't back, and keeping track of what Donald Trump says got old quick. The betting community, seeking a bigger thrill from an honest game, has turned to the stock markets. Which we all know are as honest as the day is long.
Now, with normal sports betting markets closed, that project seems to be on hold. Instead, the interest is in the other direction. "Millions of small-time investors have opened trading accounts in recent months, a flood of new buyers unlike anything the market had seen in years." https://www.nytimes.com/2020/06/14/business/sports-gamblers-stocks-virus.html. Bored sports bettors may not be as large a factor as institutional investors, but they are having an impact on the markets. They are sitting on $13 billion that used to be legal sports bets, and perhaps as much as ten times that much in what used to be illegal sports bets. TD Ameritrade, Schwab and E*Trade have opened more than 1.5 million new individual accounts this year, just as they eliminated fees and commissions. Robinhood, the millennials' favorite broker, opened 3 million new accounts in the first quarter.
These new players also have their own loudmouth cheerleader in Dave Portnoy, to whom Jim Cramer doesn't hold a candle. Usually a sports betting guru, he now has rebranded himself as "Davey Day Trader." He gives guidance to his flock from a site festooned with soft-porn, including, I would say, a two paragraph disclaimer that he is not a broker or an investment adviser and, basically, that no one should listen to him. You can read it yourself. https://www.barstoolsports.com/video/2574152/davey-day-trader-june-17-2020. But I doubt his followers will heed that disclaimer any more than the rest of us listen to the convoluted warnings foisted on us.
Anyway, I have no complaints about Portnoy. By all accounts, he and the rest of these new amateur traders are having a blast. "Same rush" as sports betting, Portnoy is quoted saying. Likewise, stocks have replaced sports as a main topic of conversation among former sports gamblers. "It's funny," said one of his acolytes, "we talk about [the market] like we talk about the betting." Well, why wouldn't they. After all, the very best explanation of the credit derivatives markets of 2007-2008 was in a casino.
But there are dangers lurking in the markets that don't haunt the typical NFL game. Forbes reported a couple of days ago that a 20-year old trader killed himself after seeing a negative $730,000 cash balance in his Robinhood account. https://www.forbes.com/sites/sergeiklebnikov/2020/06/17/20-year-old-robinhood-customer-commits-suicide-after-seeing-a-730000-negative-balance/#1a846d995928. To compound the tragedy, it may not even have been a real loss, just an artificial accounting of option positions that would flatten out when trades settled a few days later. Mysteries like that, as well as the dollars these amateur traders command, may be make them more responsible for the markets' recent wild gyrations than we'd like to admit. These guys don't even pretend to know the difference between a double-top and a discounted cash flow, and some might not even know how to read an account statement. They're just looking for the rush. But there are enough of them to move markets -- unpredictably; is there any other way? "It'll be interesting," one sports gambler-cum-trader said, "when sports come back, how invested I am in sports." Yes. It'll be interesting for the rest of us too.
Aegis Frumento is a partner of Stern Tannenbaum & Bell, and co-heads the firm's Financial Markets Practice. Mr. Frumento represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations); SEC and FINRA regulated firms and persons on regulatory compliance issues and in SEC and FINRA enforcement investigations and proceedings; and senior executives of public corporations personal securities law and corporate governance matters. Mr. Frumento also represents clients in forming and registering broker-dealers and registered investment advisers, in developing compliance policies, procedures and controls, and in adopting proper disclosure documents. Those now include industry professionals looking to adapt blockchain technologies to finance and financial market enterprises.
Prior to joining the firm, Mr. Frumento was a managing director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP.
He graduated from Harvard College in 1976 and New York University School of Law in 1979. Mr. Frumento is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.
NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of BrokeAndBroker.com Blog.