Discover more from Irregular Expressions
Young traders’ enthusiasm for high-risk trading and a radically simplified user experience are radically transforming the market. Driven by highly accessible trading apps and a year spent in lockdown, these shifts ensure the future of fintech is anything but certain.
And apps like Gatsby, Robinhood, and E-Trade are drawing in unprecedented numbers of young investors whose attitude to trading is radically different from previous generations.
Gatsby cofounder Jeff Myers is riding the wave. Gatsby is a social network and a commission-free stocks and options trading platform. Its name a deliberate nod to the famously wealthy character of Jay Gatsby, the app strips away jargon and simplifies the process of trading, allowing users to express trade opinions with more leverage and find inspiration and ideas in their friends’ trades. And apps like Gatsby, Robinhood, and E*Trade are drawing in unprecedented numbers of young investors whose attitude to trading is radically different from previous generations.
This generation really wants to use trading as a form of entertainment.
“This generation really wants to use trading as a form of entertainment,” says Myers. When he and co-founder Ryan Belanger-Saleh started developing the app in 2017, they started by talking to their friends. “Most of them had maybe 90% of their money on a robot adviser or a savings account, just sitting around passively in a more responsible way. With the remaining 10% they were trading cryptocurrencies, sports betting—whatever alternative form of investing that typically has a lot of volatility and an adrenaline rush.” Younger people were open to a level of risk, older, more traditional investors were not. “They have less money and less access to opportunity than previous generations in America. They’re in the gig economy. There’s a very entrepreneurial spirit among Gen Z and Millennials,” Myers points out.
The trend toward younger traders with a high risk affinity was only accelerated by the pandemic.
The trend toward younger traders with a high risk affinity was only accelerated by the pandemic. A 2021 E*Trade study showed 58% of investors under 34 are trading more frequently, and 55% said they are trading derivatives more frequently. A survey conducted by the investment management service Nutmeg found that its users aged 25-34 were most bullish about personal finances and investing. Robinhood’s customer base, whose average age is 33, grew by three million users in the first four months of 2020. Some industry experts estimate that Robinhood’s current user base is closer to 20 million, a number Robinhood has not confirmed.
Regardless of the numbers, it’s a fact that apps like Gatsby are designed to appeal to Millennial and Gen Z investors.
Regardless of the numbers, it’s a fact that apps like Gatsby are designed to appeal to Millennial and Gen Z investors. Young traders, Myers notes, are plugged into multiple information workflows simultaneously, and they don’t want an interface that interferes with their access to other content streams. “When we first started Gatsby we designed it for ourselves, but that put us into a position where we were attracting very young traders. We thought, what are cool features that young traders specifically would want?”
In addition to its simplicity and accessibility, Gatsby’s users are drawn to the app’s social feed, which lets users see and take inspiration from community trends along with other feeds, like Twitter or TikTok. Community members start to recognize prolific users and pursue bullish behavior trends on the same ticker. “We baked that concept right into the app. Gatsby is a social network. You can see what everybody’s trading, you can like each other’s trades, you can comment on your trades. So I think every little differentiator that we have, every feature that we have that another brokerage doesn’t, or does a little bit differently, is tailored around this specific segment of traders.”
But critics say apps like Gatsby and Robinhood put young investors at risk by turning trading into a game without making users aware of the consequences.
But critics say apps like Gatsby and Robinhood put young investors at risk by turning trading into a game without making users aware of the consequences. In June of 2020 a 20-year-old Robinhood investor died by suicide after mistakenly believing he’d lost $750,000 on a risky trade. His parents, who are suing the company, say Robinhood deliberately targets young, inexperienced users and pushes them into high-risk trading.
You can't take speculation as a strategy in your portfolio and assume that you're going to make money.
“You can't take speculation as a strategy in your portfolio and assume that you're going to make money,” Myers says. “And we try to be very clear that there's a lot of risk involved in trading options, which are inherently very speculative. But you can use it to hedge other elements of your portfolio, or you can view it as just a fun thing to do with a small portion of the portfolio.” He also points out the users themselves are subject to encounter unusual market conditions like trade halts. “We have a push notification on specific tickers that have either SEC- or FINRA-driven warnings—or even our own warnings—about certain scenarios in the market. We've done it if something's expected to be extremely volatile and one of the exchanges will halt trading around it. Which also irritates users. And they usually blame the introducing broker, even though it just isn't trading, it's frozen by the exchange.”
Like any other investment platform, Gatsby operates in a post-commission based brokerage revenue stream. “We’re actually big believers in payment for order flow,” Myers explains. “The concept is what allows any type of exchange to have a healthy source of liquidity, right? If you’re trying to make a fine art marketplace, you need art and you need buyers, and you would probably pay to have more buyers on your platform and have more fine art for them to buy. And that’s sort of what payment for order flow is.” Myers agrees that payment for order flow got a bad reputation early on, in part because Robinhood in particular denied taking it. Transparency, he says, is extremely important. “We like to be very upfront with our users on that. It’s how we drive revenue. In fact, now that commissions are more or less gone, our approach is to add transparency.”
20% of all retail traders currently holding positions now bought their first position in 2020. Every month, so far, in 2021 has had a higher volume of options contracts traded than any other year in history. 2021 is a monster year for trade volumes driven largely by retail traders.
Gatsby has been able to nimbly capitalize on the rapid shift from passive investment accounts to active trading, but Myers points out that the investment world is changing so rapidly that it’s impossible to predict how regulators will navigate trends around volatile products like cryptocurrency or meme stocks. “20% of all retail traders currently holding positions now bought their first position in 2020. Every month, so far, in 2021 has had a higher volume of options contracts traded than any other year in history. 2021 is a monster year for trade volumes driven largely by retail traders. Which shows a correlation in interest out there tied to meme stocks—you can definitely inversely correlate our cost per acquisition to the price of GameStop as of this year, and Tesla was basically a meme stock the entire last year.”
But there’s this brand new concept of trading as entertainment having a crazy impact on stock values. I think that’s more of a culmination of a trend than a brand new phenomenon, but it’s fun.
For Myers, the uncertainty is part of the package—and that’s a good thing. He prescribes embracing the risk-taking spirit of adventure that characterizes Gatsby’s users. “With nobody really to blame, the regulators don’t know what to do about it, or who’s responsible, or if the brokers should have prevented it. But there’s this brand new concept of trading as entertainment having a crazy impact on stock values. I think that’s more of a culmination of a trend than a brand new phenomenon, but it’s fun.”
Gatsby is a no-commission stocks and options trading platform that makes investing approachable to everyone.
Raised $13m as of May 2021 from Techstars, Beta Bridge Capital, Rosecliff Ventures, SWS, Barclays, Plug and Play