Sports have been gone for months, leaving habitual bettors high and dry – and searching for an alternative.
Eilers & Krejcik Gaming, a research and consulting firm, reported that sports betting revenues fell about 60% from February to March. They may have fallen as much as 80% more in April. Casinos, which might have normally filled the gap for sports bettors without sports, went dark during lockdowns and are opening with limited offerings now that those lockdowns have eased in many places. Restless sports fans have been reaching for something to fill the gap, resorting to betting on events such as marble racing. (Yes, really.) But a large number seem to have turned to something a bit more mainstream, if less reminiscent of actual sports: the stock market.
Last fall, major brokerages including Charles Schwab Corp., TD Ameritrade and E-Trade eliminated commissions on most online trades. Newer companies, prominently including Robinhood Markets Inc., already offered free trading. So stock market trades offered a two-pronged appeal in the era of lockdown: a low barrier to entry and full access while stuck at home.
Bloomberg columnist Matt Levine observed that people might be trading out of boredom as early as April. He wrote, “The weird thing about the coronavirus crisis is that it simultaneously (1) caused a stock market crash and (2) eliminated most forms of fun.” In his assessment, trading stocks at home doesn’t have to be more fun than things you would normally do. It only has to be more fun than available alternatives.
Whether out of boredom or other motives, individual investors are trading more than they were before COVID-19. Online brokerages experienced significant bumps in activity and customers opening new accounts in the early months of the pandemic. Economists at Paderborn University in Germany found that the trading activity of retail investors at a major U.K. brokerage increased by about 14% for every doubling of COVID-19 cases in the early months of 2020. The Wall Street Journal reported that TD Ameritrade, E-Trade and Schwab all saw record new brokerage accounts in the quarter that ended March 31. Most of these were retail accounts, and most were opened in March, as COVID-19 picked up in the United States. All three companies noted strong interest from first-time investors. Robinhood reported that daily trading volume in the first quarter of 2020 was three times greater than in the last quarter of 2019. The company said it had added more than 3 million new accounts by early May.
The Financial Times was among the first outlets to attribute some of this spike specifically to sports gamblers deprived of their usual pastime. Daniel Goodwin, who routinely bet on sports before the pandemic, told the Financial Times that he returned to a dormant E-Trade account when sports dried up. “I’m not here for the long run — I just want to throw a thousand bucks at something to see if I can make a few hundred,” Goodwin said. Dave Portnoy, founder of the popular blog “Barstool Sports,” is a higher profile sports gambler turned day trader. While there’s no clear measure of how many new investors are sports gamblers without other outlets, some analysts say signs of aggressive, short-term focused behavior point to a large number.
This influx of new investors, many driven by boredom or sports fandom withdrawal, has led to some strange market events. The most prominent may be the post-bankruptcy surge in Hertz’s stock price. Even though bankruptcy doesn’t mean a company immediately goes dark, share prices almost always drop, since ordinary shareholders are at the back of the line when the court divides company assets. Yet Hertz’s shares gained almost 900% in the weeks after it filed for Chapter 11 bankruptcy protection. Financial professionals were perplexed. Hertz went as far as announcing it would sell $1 billion of new shares, until the Securities and Exchange Commission raised concerns and Hertz called off the sale.
Some of the people buying Hertz likely misunderstood the classic advice to “buy low” or were simply following the crowd. But some financial professionals suspect certain buyers were people essentially treating it like a bet with very long odds. In this reading, buying Hertz stock isn’t an investment; it’s buying a lottery ticket.
Hertz is likely the most striking example of a market oddity, but it’s not the only one. New investors piled into stocks for airlines and cruise lines in March. As with Hertz, this may be a case of “buying the dip” while imagining these companies must eventually bounce back. But no such recovery is guaranteed, especially as the pandemic drags on. Steve Sosnick, chief investment strategist at online trading platform Interactive Brokers, described the rush to grab stocks more experienced investors would avoid as “a flight to crap.”
These speculative investors are not moving the whole market. Many, if not most, are trading in amounts too small to create major effects, even in the aggregate. Software and data aggregation company Envestnet Yodlee found that stock trading was among the most popular uses for stimulus checks; $1,200, even many times over, won’t create a wide swing. There are other reasons for the discrepancy between the economy and the stock market.
These investors are, however, creating incentives for investment firms to capitalize on their interest in trading. Brokerages including Schwab and Fidelity now offer the ability to buy tiny fractions of stock worth hundreds or thousands of dollars per share. So-called “fractional investing” is another feature the major brokerages have copied from apps like Robinhood. This practice makes little sense for a serious, long-term investor. But to someone just looking to turn $50 into $100 out of boredom or in search of a rush they can’t get with sports out of commission, it may seem like a good deal. Low-cost index funds are undeniably useful for building wealth, but they aren’t especially entertaining.
It seems unlikely that sports bettors will stick with the stock market when other options return. Fewer people will be sitting at home in front of a screen all day as lockdowns ease. And, perhaps more pertinently, predicting sports outcomes can be much less difficult than predicting short-term market moves. The former isn’t easy, but historical data suggests the latter is all but impossible. As Frankie Taddeo observed for Sports Illustrated, “The best sports bettors in the world only win 55 percent of the time. Historically, day traders tend to lose at an even more staggering rate.”
Major league baseball returned last week, and professional basketball is set to return this week. I was skeptical of socially distant baseball at first, but I’ve enjoyed watching it. I suspect many sports gamblers will migrate back to their original hobby once they can. If so, cases like Hertz’s will serve as historical aberrations reflecting the strange times we have been living through, not as harbingers of the new normal.
Posted by Paul Jacobs, CFP®, EA
Sports have been gone for months, leaving habitual bettors high and dry – and searching for an alternative.
Eilers & Krejcik Gaming, a research and consulting firm, reported that sports betting revenues fell about 60% from February to March. They may have fallen as much as 80% more in April. Casinos, which might have normally filled the gap for sports bettors without sports, went dark during lockdowns and are opening with limited offerings now that those lockdowns have eased in many places. Restless sports fans have been reaching for something to fill the gap, resorting to betting on events such as marble racing. (Yes, really.) But a large number seem to have turned to something a bit more mainstream, if less reminiscent of actual sports: the stock market.
Last fall, major brokerages including Charles Schwab Corp., TD Ameritrade and E-Trade eliminated commissions on most online trades. Newer companies, prominently including Robinhood Markets Inc., already offered free trading. So stock market trades offered a two-pronged appeal in the era of lockdown: a low barrier to entry and full access while stuck at home.
Bloomberg columnist Matt Levine observed that people might be trading out of boredom as early as April. He wrote, “The weird thing about the coronavirus crisis is that it simultaneously (1) caused a stock market crash and (2) eliminated most forms of fun.” In his assessment, trading stocks at home doesn’t have to be more fun than things you would normally do. It only has to be more fun than available alternatives.
Whether out of boredom or other motives, individual investors are trading more than they were before COVID-19. Online brokerages experienced significant bumps in activity and customers opening new accounts in the early months of the pandemic. Economists at Paderborn University in Germany found that the trading activity of retail investors at a major U.K. brokerage increased by about 14% for every doubling of COVID-19 cases in the early months of 2020. The Wall Street Journal reported that TD Ameritrade, E-Trade and Schwab all saw record new brokerage accounts in the quarter that ended March 31. Most of these were retail accounts, and most were opened in March, as COVID-19 picked up in the United States. All three companies noted strong interest from first-time investors. Robinhood reported that daily trading volume in the first quarter of 2020 was three times greater than in the last quarter of 2019. The company said it had added more than 3 million new accounts by early May.
The Financial Times was among the first outlets to attribute some of this spike specifically to sports gamblers deprived of their usual pastime. Daniel Goodwin, who routinely bet on sports before the pandemic, told the Financial Times that he returned to a dormant E-Trade account when sports dried up. “I’m not here for the long run — I just want to throw a thousand bucks at something to see if I can make a few hundred,” Goodwin said. Dave Portnoy, founder of the popular blog “Barstool Sports,” is a higher profile sports gambler turned day trader. While there’s no clear measure of how many new investors are sports gamblers without other outlets, some analysts say signs of aggressive, short-term focused behavior point to a large number.
This influx of new investors, many driven by boredom or sports fandom withdrawal, has led to some strange market events. The most prominent may be the post-bankruptcy surge in Hertz’s stock price. Even though bankruptcy doesn’t mean a company immediately goes dark, share prices almost always drop, since ordinary shareholders are at the back of the line when the court divides company assets. Yet Hertz’s shares gained almost 900% in the weeks after it filed for Chapter 11 bankruptcy protection. Financial professionals were perplexed. Hertz went as far as announcing it would sell $1 billion of new shares, until the Securities and Exchange Commission raised concerns and Hertz called off the sale.
Some of the people buying Hertz likely misunderstood the classic advice to “buy low” or were simply following the crowd. But some financial professionals suspect certain buyers were people essentially treating it like a bet with very long odds. In this reading, buying Hertz stock isn’t an investment; it’s buying a lottery ticket.
Hertz is likely the most striking example of a market oddity, but it’s not the only one. New investors piled into stocks for airlines and cruise lines in March. As with Hertz, this may be a case of “buying the dip” while imagining these companies must eventually bounce back. But no such recovery is guaranteed, especially as the pandemic drags on. Steve Sosnick, chief investment strategist at online trading platform Interactive Brokers, described the rush to grab stocks more experienced investors would avoid as “a flight to crap.”
These speculative investors are not moving the whole market. Many, if not most, are trading in amounts too small to create major effects, even in the aggregate. Software and data aggregation company Envestnet Yodlee found that stock trading was among the most popular uses for stimulus checks; $1,200, even many times over, won’t create a wide swing. There are other reasons for the discrepancy between the economy and the stock market.
These investors are, however, creating incentives for investment firms to capitalize on their interest in trading. Brokerages including Schwab and Fidelity now offer the ability to buy tiny fractions of stock worth hundreds or thousands of dollars per share. So-called “fractional investing” is another feature the major brokerages have copied from apps like Robinhood. This practice makes little sense for a serious, long-term investor. But to someone just looking to turn $50 into $100 out of boredom or in search of a rush they can’t get with sports out of commission, it may seem like a good deal. Low-cost index funds are undeniably useful for building wealth, but they aren’t especially entertaining.
It seems unlikely that sports bettors will stick with the stock market when other options return. Fewer people will be sitting at home in front of a screen all day as lockdowns ease. And, perhaps more pertinently, predicting sports outcomes can be much less difficult than predicting short-term market moves. The former isn’t easy, but historical data suggests the latter is all but impossible. As Frankie Taddeo observed for Sports Illustrated, “The best sports bettors in the world only win 55 percent of the time. Historically, day traders tend to lose at an even more staggering rate.”
Major league baseball returned last week, and professional basketball is set to return this week. I was skeptical of socially distant baseball at first, but I’ve enjoyed watching it. I suspect many sports gamblers will migrate back to their original hobby once they can. If so, cases like Hertz’s will serve as historical aberrations reflecting the strange times we have been living through, not as harbingers of the new normal.
Related posts: