Before Meme Stocks, WallStreetBets Traders Mainlined Options

An excerpt from Nathaniel Popper's new book "The Trolls of Wall Street."

AccessTimeIconJun 13, 2024 at 3:44 p.m. UTC

The crypto boom in the final months of 2017 woke up millions of people to the idea that you could get rich from your phone. In December alone, three million people downloaded the app for Coinbase, the main American crypto exchange. Coinbase had been much smaller and less popular than Robinhood, but in December, it got about six times more downloads.

Nathaniel Popper is the author of "The Trolls of Wall Street: How the Outcasts and Insurgents Are Hacking the Markets" (from which this article is excerpted) and "Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money." He has worked as a reporter for The New York Times, The Los Angeles Times and The Forward.

A month later, as the newly assembled crowds watched the value of bitcoin (BTC) and many other digital tokens plunge in January of 2018, those who had not lost their shirts completely went looking for an alternative place to direct their freshly awakened hunger for speculative excitement. TD Ameritrade reported that trading activity in January was up 48% from a year earlier, with the fastest growth coming from Millennial customers. It didn’t hurt that stocks had gone up alongside bitcoin. The benchmark S&P 500 index finished 2017 up 22%, its ninth positive year in a row.

Robinhood had missed the bitcoin boom, only announcing an expansion into crypto trading at the end of the bubble. But the company managed to have perfect timing for what came next. In December 2017, the start-up had announced it was about to begin allowing customers to trade options contracts. As it had with stocks, Robinhood eliminated the commissions that other brokers charged for options trading. The announcement had been largely ignored at the time because of the focus on crypto. But in January, attention quickly turned to the new capabilities opened up by Robinhood.

“Lost 5k in crypto, ready to lose another 5k trading options — where do I start to begin my path to autism?” one characteristic post asked in early 2018.

This was something of a replay of early 2015 when WallStreetBets had suddenly whirred to life in the wake of Robinhood’s initial launch. Now, after struggling in the shadow of crypto, WallStreetBets was again overflowing with newcomers eager to try out Robinhood’s latest offering.

“I’ve never seen an influx of noobs like there is right now,” one Reddit old-timer wrote. “It’s obviously because of RH.”

But this new burst of activity on WallStreetBets was viewed with much more suspicion than the previous one. Jaime had started the subreddit as a result of his interest in the alluring complexity of options. But after going through numerous bouts of losing, he realized, with the help of outsquare, that the odds were stacked against small-time investors in the options markets.

“If I have but a single regret of starting this wonderful community it is the incessant obsession and poor understanding of options,” Jaime wrote in a cautionary post.

Options, he wrote, are “incredibly stupid ways of throwing perfectly good money down the dark bowels of Wall Street.”

Trading options doesn’t necessarily look dangerous on its face. In the most basic terms, an option is just a way to bet on the future value of a stock without having to buy that stock. But there are lots of devilish risks buried in the intricate structure of options. The most obvious danger with options is that, unlike stocks, they expire on a specific date. If the stock price did not do what you had bet it would do by that date, you lose all the money you put in.

(HarperCollins)
(HarperCollins)

Due to the binary, win-or-lose nature of options, they are often referred to as the lottery tickets of the financial markets. If you own a stock and the price falls, it generally still has some value and you can wait for it to recover. But with an option, if your bet goes south, you are left with nothing — and that is indeed how it usually ends. The inherent risk of options is multiplied by the fact that most opions are pegged to the price of 100 shares of the underlying stock. This means they can go up much faster than the actual stock — an attractive feature for the risk-seeker — but they can go down just as fast.

Jordan had disagreed with Jaime on other things, but when it came to options, they found common ground. Like Jaime, Jordan warned users to stay away from options unless they had a very clear idea of what they were doing.

“options will make your dick fly off” was how Jordan put it. “it’s scientifically proven.”

But these voices of caution and the early posts about losses only seemed to rev up the appetite for risk on the subreddit. One user mentioned losing 93% of his portfolio. Right below that, another user quickly one-upped him with perverse pride: “To the guy who posted his 93% loss. This is a real 90% loss.” The post showed a picture of the Robinhood home screen with a line descending sharply from $22,000 to $2,000 in less than a month.

In 2018, WallStreetBets once again began to attract media coverage, and the articles took note of both the growth of the subreddit — which was up to 300,000 members by mid-2018—and the bizarre penchant members seemed to have for losing money. The first magazine profile of the website, in Money, was titled: “Meet the Bros Behind /r/WallStreetBets, Who Lose Hundreds of Thousands of Dollars in a Day — and Brag About It.”

The WallStreetBets regular featured at the top of the story was a 24-year-old programmer who had found options trading on Robinhood after making a small killing on crypto. He then managed to lose $180,000 in a matter of days on a single bet on Facebook stock.

Jaime had embraced many of the earlier questionable developments on WallStreetBets. But when the reporter for Money reached out to him, he expressed his discomfort. He said that he had founded the site with the goal of creating a “serious forum for learning” and emphasized that he was “not a huge fan of the memes.”

There was lots of talk about the strange imperviousness to losing money on the subreddit, and there would be for years to come. Jordan engaged with one member who said he had assumed the so-called loss porn was “an obscene joke,” before he realized that “it seems when asked seriously they really prefer losing money.”

Jordan explained his belief that the attitudes on the site were a coping mechanism. “People lose a bunch of money, they come laugh about it with others who lost a bunch of money, and everyone is happy. What’s better, to lose money and be bitter, or to lose money and feel like you fit in with the other guys? People take the path of least resistance emotionally.”

This rationale, though, seemed to hit on only one of the many factors that showed up in WallStreetBets posts in the course of 2018 to explain the rising penchant for extreme risk-taking.

One reason that many people gave for their willingness to bet on crypto and options was the precarious financial situation many of them had found themselves in — and their desire for a quick solution. Millennials were carrying unprecedented levels of student debt; in 2018, the average student-debt load of young Americans was more than twice what it had been back in the 1990s. For recent graduates trying to stay on top of the interest payments, the allure of a financial Hail Mary was obvious, especially when they looked at the escalating value of real estate and contemplated the difficulty of ever purchasing their own homes. One novice in 2018 pointed to these issues to explain his own decision to dive in.

“Hey guys, I’m $10,000 in debt and I’m thinking about day-trading stocks to overcome my financial woes! But first, how do you trade options?”

Once people got going, the internal feedback loop that got kicked off by trading often sucked them in further. The excitement of watching your portfolio go up stimulates the same neurotransmitters associated with other addictive activities, creating jolts of dopamine that can quickly generate a desire for more. Researchers have found that young men — the core audience on WallStreetBets — are particularly prone to this sort of addictive behavior and that fast-moving options play on these dynamics more than stocks. There were countless posts from people who said they found themselves almost helpless as they chased the high and ended up losing both their profits and the original money they put in.

“Options are like heroin,” one user explained. “You try a little bit once and nothing hits the same ever again.”

This got particularly problematic for the many young men who had been diagnosed with attention deficit hyperactivity disorder, ADHD, as was the case for more and more young men in America. People with ADHD generally do not produce enough dopamine or they have difficulty processing it, which often leads them to seek out activities that will create more of the pleasure-producing hormone. Jaime was one of many people in the early chat room who talked about his ADHD diagnosis. He observed that this seemed to be at least partly responsible for his attraction to both alcohol and trading, and research indeed shows that people with ADHD are much more vulnerable to gambling addictions.

Robinhood played on all these instincts in its young customers in a way that no other brokerage firm had ever done before. The company added lots of little special effects that increased the dopamine-inducing qualities of the app, most famously showering users with digital confetti whenever they bought or sold a stock. The company also took away many of the little reminders of risk and the points of friction that other brokerage firms put in front of customers before they completed a trade; friction that allowed customers to take a beat and consider whether the trade was a wise one. Natasha Dow Schüll, an academic expert on gambling, later pointed out that Robinhood used many of the same tactics that Las Vegas casinos employed to get their customers to forget their losses and place another bet.

But long before Robinhood showed up with its gamified version of options trading, young men were coming to WallStreetBets seeking the kind of risk and drama that the subreddit put on display, even when it involved losing money. Social media had, of course, played a role in this. Researchers have found that young men are more willing to take bigger risks when they are in the company of other young men, and the crowds on Reddit certainly egged each other on.

For the average young denizen of 4chan who was stuck at home without a job or friends, the internet was a place to do stupid things to create a little excitement and achieve a few minutes of online fame. Losing money was often the easiest path to achieving these goals. Dale Beran, the 4chan expert, argued that the site had long before developed a culture that elevated failure to a kind of art form.

“It is a culture of hopelessness, of knowing ‘the system is rigged,’” Beran argued.

The nihilistic attitude on WallStreetBets was made manifest by the image of the tendies, the preferred way to describe any winnings a trader managed to eke out of the markets. The term, which came from 4chan, referred to the chicken tenders a young basement dweller might get from his mom as a reward for good behavior. If your portfolio was just so many chicken nuggets that your mom could always replenish, who cared if you lost a few? This attitude came out when a trader who went by a crude username shot to fame by making over half a million with Robinhood options and then, just as loudly, making it all disappear.

“At The End of the Day, Money is Just Paper,” he wrote in the post announcing his biggest losses.

Jordan got asked about these bizarre dynamics when the latest reporter showed up, this one from Vice. “One thing I always notice about chan sites is this underlying nihilism,” the reporter, Roisin Kiberd, said. “Even way before the alt right and pepe and trump stuff. So I was wondering if that’s present on WSB too. Like, burn it all, lose your money.”

Jordan initially responded by pointing to the contagious, addictive nature of trading. “I think of trading like getting leprosy,” he told the reporter. “Once someone has the bug you have no idea if they’ll make it. Sometimes it costs them an arm and a leg.”

But he acknowledged that losing had become a central element of the community dynamic. “At the end of the day we’re just a bunch of guys at varying levels of seriousness trying to make it in something that people will tell you is impossible. Helps to have company,” he said. “Nobody wants to sit at their computer alone for years.”

Jordan had continued to struggle to make any money from his own efforts in the markets, despite all the advice he had gotten from lakai and outsquare. He knew that his nervous energy haunted his best trades.

“patience has been like the hardest part of this shit for me

“how often are you right but you don’t wait for it to go sideways and then do what you expected,” he said in the chat room.

“no patience no money,” lakai chimed in.

“I tried copying lakai,” Jordan told the others.

“you just can’t

“you end up being one of those cargo cult people

“waving your hands hoping a 747 will land.”

Jordan took long breaks from trading and spent more time playing video games with his fellow moderators or coming up with new bots to deal with the problems cropping up on the growing subreddit. As traffic to the site grew, Jordan, lakai, and a rotating cast of moderators developed an increasingly complex set of rules and structures to make the deluge of content navigable. Reddit’s system of elevating posts with more upvotes provided a basic order. But as WallStreetBets began to attract hundreds of posts every day — and thousands of comments — things could easily get out of whack unless the moderating team kept a careful watch.

Lakai and the other moderators created systems so that it was easier to find particular genres of content on the subreddit. They used labels — or flair, as they were known on Reddit—to distinguish the more serious posts with due diligence, or DD, from the so-called loss-porn and meme posts. Jordan created increasingly sophisticated bots to ensure the rules were followed. But they inevitably made errors, and a lot of the work fell to Jordan and a few others who would manually go through the queues to ensure the wrong posts hadn’t been deleted or allowed through.

In addition to doing the digital grunt work and coding, Jordan also brought a very human touch to the job. Unlike outsquare and Jaime, who moderated with a light hand, Jordan constantly roamed the comment sections beneath posts, giving advice and prodding the guys on the site to be smarter. He would jump in to point out obvious trading mistakes and chide people when they acted as though losing money were the point of the game rather than a regrettable side effect:

“You’re not ‘doing it right’ when you post massive losses and go ‘hurr am I one of the boys now’? It’s like a bunch of morons saw some veteran traders comparing battle scars and decided to cut themselves so they could join the conversation and get attention.”

He also stepped into the role that outsquare had played in the early chat room, a sort of gruff therapist. He went into action toward the end of 2018 when a post showed up that underscored the real-world damage that could result from the attention-seeking pursuit of riches.

“I broke down crying on the subway today,” one of the recent losers wrote. “I saved up $5k in 2 months working as a busser. Grew my portfolio to around $11k quit bussing and lost it all trading options and will have to find work again in a shitty restaurant. I have no future. I have no education or skills. I work as a shitty busser and i’m 23. It’s pathetic. I have no girlfriend and never have had one. I don’t know what to do or how to make money to escape this shitty cycle. I’m ending it all by 25.”

Jordan pinned this post and his own response to the top of the site. “I’m gonna leave this one up so OP” — an acronym for original poster — “can see that WSB cares about him even if we look like a bunch of assholes most of the time.”

Jordan urged the guy to take a break from trading and try to look at things from a different perspective: “Don’t throw away your most precious and irreplaceable asset because you lost some money. You’re in your 20s, even if you died at 60 most of your life is still ahead of you. You’d be surprised what reality can serve up that you might never have expected.”

When the commenters below expressed their gratitude to Jordan for his sympathetic intervention and the work he was putting in, he did not let it go to his head: “I am trying to do good by the sub even though I’m just a dork on the internet with an ego too.”

But soon enough, there were indications that Jordan’s hopes for the subreddit were coming true. The gathered multitudes were learning lessons from their mistakes, and from one another.

This excerpt provided by HarperCollins Publishers was lightly edited for house style.

Edited by Daniel Kuhn.

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Nathaniel Popper

Nathaniel Popper is the author of "Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money" as well as "The Trolls of Wall Street: How the Outcasts and Insurgents Are Hacking the Markets."