Are bored retail traders driving bets on bankruptcies?

Experts argue cheap money and low-cost robo platforms may be behind recent bizarre swings

Are bored retail traders driving bets on bankruptcies?

As robo platforms engaged in a race to zero commissions last year, critics warned of possible unintended consequences, including a heightened risk of inexperienced investors making unwise, emotion-based trades. Fast forward to today, and it seems as if the detractors might have been on to something.

In the face of the coronavirus and its impact on economic and business activity, numerous companies have been pushed over the financial brink and into bankruptcy. In normal times, such an event would be a death knell for share prices, but users of Robinhood and other stock-trading platforms have reportedly been snatching up shares of such distressed companies en masse.

The bizarre dynamic is arguably best captured by Hertz, a car-rental company that recently had to file for Chapter 11 bankruptcy. As reported by Yahoo News, the stock dumped by activist investor Carl Icahn has been snatched up by retail traders.

Shares of the company grew white-hot following news of its bankruptcy; on June 9, it exceeded 533 million in trading volume, compared to the 2 million to 7 million per day it saw one year ago. It has also been a picture of volatility of late, seeing swings as wide as 80% during last week’s frenzied trading.

Against that backdrop, Hertz asked the court overseeing its bankruptcy proceedings for the right to sell US$1 billion in new shares of stock. It got permission to do so, but had to tell buyers its shares were all but certain to get wiped out.

“What you're getting right now is this great disconnect between fundamentals and finance,” Mohamed El-Erian, chief economic adviser at Allianz, said in an interview with CNBC.

Other risky companies have seen similarly wild rides recently, including J.C Penney, another firm currently in Chapter 11, and Chesapeake Energy. Many of those watching the trend are ascribing the trend to a narrative of retail traders – some with stimulus checks in hand – who are turning to the stock markets as a source of excitement in lieu of sports and betting.

“Clearly there’s some speculative fever going on right now,” Kathy Jones, Charles Schwab’s chief fixed income strategist, told Yahoo News. “Money is cheap, trading is cheap, and this is what they’re doing.”


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