You may have seen the recent Bloomberg article where they report:

Just in the last week, 96,000 people on the Robinhood investing app opened a position in Hertz Global
Holdings Inc. The number of users holding Whiting Petroleum Corp. grew roughly 10,000 in the last 24 hours.

Two things the companies have in common: They’ve filed for bankruptcy protection. And each saw their shares double to start the week.

....

Robintrack’s data show 159,000 users now hold Hertz stock in some form. That’s a record high, and up from 37,000 users a month ago. Over the last three days, the car rental firm has seen the largest surge in popularity on the platform. Right now, more users on the investing app hold bankrupt Hertz than do Netflix Inc.

Call it crazy, but don’t call it dumb. In the three sessions through Monday, Hertz shares surged 577%, just weeks after the company filed for bankruptcy. Trading volume in the stock has surged to an average of 197 million shares a day in June -- more than 60 times what was typical in 2019.

Chesapeake Energy has seen a similar turn. The oil company jumped 182% on Monday, and after markets closed, news broke that the firm was said to be preparing to file for bankruptcy. More than 20 million shares changed hands, the most turnover on record for the stock in a single day, Bloomberg data show. In recent days, Chesapeake’s popularity with users of Robinhood ballooned to 38,000 -- a gain of 9,000.

Same with Whiting Petroleum, a shale driller that went bankrupt in April. The number of users holding shares of the company rose to a record 50,000 this week. On Monday, the stock surged 152%, and more than 104 million shares traded.

I bet the High Frequency Traders are having a blast frontrunning these trades...and Robinhood is making a boatload in payment for order flow.  It reminds one of the bucket shops of the 1920s.  Zero commission trading is probably a watershed for the order flow business and very profitable for brokerages who can direct trades to the highest-paying exchange.

Another accelerant is fractional share trading.  Robinhood started this, but now even Schwab
is doing it, advertising $5 trade totals for ANY stock, even Amazon.

And for the punters, it’s basically an online casino offering hours of fun for a few hundred bucks. 
I suspect they all know they will lose to the house in the end - the companies are bankrupt after all - but knowing the house always wins has never stopped people from going to Vegas!

Okay, this just completely blows my mind. I know how investors like to apply formulas for valuations but then Tesla goes bananas and the shorts get destroyed, or Amazon tanks and investors call for the ouster of Jeff Bezos before he becomes the richest man and Amazon the most valuable company.

Oh my God.

But apparently some of these guys are making out okay and having a lot of fun doing it:

Robinhood traders are betting against veteran billionaire investors like Warren Buffett and Carl Icahn - and they're winningThere has been a surge in retail trading activity since the COVID-19 stay-at-home orders swept across the nation. The increase in trading activi...markets.businessinsider.com

In a bizarre update to the story about newbie retail traders – I hesitate to call them investors – day trading in bankrupt companies, bankrupt Hertz Corporation has announced its intent to sell $1B in new stock, taking advantage of its recently elevated share price.

That’s “B” for Billion. In a bankrupt company.  They’re issuing stock because Hertz’s bondholders believe the equity will be much less costly than the debtor-in-possession (DIP) financing typically used to revive bankrupt companies.

Now as nearly everyone knows, shareholders are usually wiped out in a bankruptcy since common equity is lowest on the preference stack.  The IRS and other taxing authorities are first in line, followed by employees, vendors, bondholders and finally shareholders.

But bondholders are smart. They know any new DIP financing will go to the top of the stack, pushing them down.  But new common equity investment will slide in below the bondholders, allowing bondholders to recover more of their investment at the expense of the new shareholders.

If there’s any silver lining to this, its that most of these rookies are speculating with just a few hundred bucks.  It’s not like anyone’s betting their retirement on these bankrupt companies.  At least I hope not. 

As a counterpoint, bankruptcy speculation is introducing hundreds of thousands of new folks to the stock market.  Hopefully a percentage of them will evolve into investors. 

Or maybe not and we’ve just invented a new type of legalized gambling where anyone can play.

Hertz seeks unusual $1bn share sale while in bankruptcyMove by car rental group would come in place of tapping a senior debt loanwww.ft.com

With professional sports and college sports and horse racing all closed, gamblers had to find a new venue to place bets on....... The idea that one is going to beat the Street long term with short term bets, strikes me as a bit mis informed. WDIK

Kinda like taking money to the tables in Vegas to invest it.

Alan, how does it work to raise $1 billion in equity when the market cap of the company stands at $400 million? So the $1 billion ends up on the balance sheet as money the company can use for operations but the existing shareholders are all diluted down to nothing? I don’t know how to think about it.

Also, $1 billion seems like a lot, but they have something like $19 billion in debt... $13 billion is for their fleet of cars. I wonder how much that monthly payment is? Maybe they sell half the fleet to pay down half the debt? But even then you still owe $10 billion. Whoa.

I bet the High Frequency Traders are having a blast frontrunning these trades...and Robinhood is making a boatload in payment for order flow.

For those unfamiliar with payment for order flow, Robinhood makes around half its profits from this. (The rest of their earnings comes from interest earned on customer cash accounts.)

Payment for order flow is a commission paid by market makers to process Robinhood’s customers’s trades. Joe Average trader is considered an uninformed investor compared to institutional investors. Market makers therefore make more money from processing these non-institutional investor trades:

“In general, market makers such as dealers and securities exchanges are willing to pay a broker for the right to transact with that broker's clients because they believe those clients will be uninformed traders—retail or other investors who are trading because of emotion or the need to raise cash and not because they know an asset is misvalued.

“By purchasing what it expects to be uninformed order flow, a market-maker can buy at the bid and sell at the ask with less risk of trading at a loss than with an informed trader who knows that the market is mispricing the security. Thus, market-makers who pay for order flow can capture the spread while reducing the risk that the spread is too narrow to adequately compensate them for the risk of loss.”

For those unfamiliar with Robinhood, it is a trading app that charges zero fees for stock trades. It’s customers are mainly Millennials under 30 and the company has a current valuation of over $8 billion.

Further reading

Bloomberg News: Robinhood Gets Almost Half Its Revenue in Controversial Bargain With High-Speed Traders

<><><>

What Is Payment for Order Flow?Payment for order flow occurs when a broker compensates another for directing trade execution as it prefers.www.investopedia.com

<><><>

Here's what happened when I gave control of my Robinhood account to an AI for a weekand how I built the AI.link.medium.com

<><><>

An article about the safety of our current banking system might be of interest to some readers - the banking system most everyone seems to be assuming is in great shape and perfectly safe from what happened last time..... From The Atlantic

The Looming Bank CollapseThe U.S. financial system could be on the cusp of calamity. This time, we might not be able to save it.www.theatlantic.com

In yet another bizarre development to this story, a professional sports betting commentator is actively blogging about his day trading exploits in these stocks using Robinhood as his platform.

Dave Portnoy Is No Robinhood For Young Investors

I read this today about CALPERS - the California Public Employees’ Retirement System is finding it difficult to generate their planned 7% asset appreciation due to low interest rates, high stock market valuations, and low economic growth - so they are planning on investing in non-liquid private equities and credit vehicles, and leveraging their investment by borrowing even more money to invest in these thinly traded, or not even traded, nor marked to market securities so that they can make their needed 7% appreciation.

Anyone have an opinion about the advisability or prudence of a financial fiduciary investing in this manner??

Opinion | Calpers Prepares for the Long HaulBy investing in private equity and credit, we expect to be able to achieve 7% returns.www.wsj.com

As I see it, the problem with endowments and pensions investing in private equity, private credit, or anything else containing the word 'private' is liquidity - the ability to convert your assets to cash quickly.

Many big university endowments followed the so-called Yale model leading up to the Global Financial Crisis, overweighting in private equity and non-traditional assets like forest land. Harvard, Princeton and many others did this.

When the GFC hit, there was a sudden need for liquidity, and non-traded assets aren't liquid. Most endowments take a 3%-4% annual draw to pay for scholarships, endowed professorships and the like. Those university endowments were hammered, forced to sell at the worst possible time to cover those draws.

Ultimately, the Harvard Management Company, the stewards of their endowment, replaced its leadership and the new leadership sold its stakes in private equity and venture capital at a steep loss in order to regain some liquidity.

Of course, liquid markets are volatile as we saw in February, March and April, so people are always nervous when prices fluctuate as they invariably do. But at least you can get cash out, which you can't with private equity or venture capital.

So while I personally think it's OK for endowments and pension funds to have some allocation in private equity, venture capital and farmland, it shouldn't be the bulk of their portfolios.

This from Fisher Investments (no relation):

Both recent and longer-running trends may also factor in the surge of new accounts. Major online brokers started offering commission-free trades late last year, perhaps enticing some new participants. COVID-19 may also have an indirect role. Rising investing interest could be a byproduct of the astronomical savings rate tied to a lack of spending and increased stimulus-driven savings. There is also the “boredom” theory: With many staying at home due to shelter-in-place orders, some people may be making some trades while their sourdough boules rise. A few may even be fulfilling their sports-betting fix by day-trading speculative penny stocks.

Robinhood's growth is amazing!

The latest numbers confirm online brokers have seen a huge influx of new accounts. Robinhood, an app-based brokerage launched in 2013 that is popular with younger investors, reported three million new accounts in Q1 2020 after hitting 10 million accounts total in December 2019.

Robinhood's growth is amazing!

I go back forever with Josh Elman, Robinhood's recent but former VP of Product & Growth, who grew his team to 50 people in a couple years.

He was a product manager at Zazzle who pitched me at SmugMug to add their stuffs to our shopping cart, but before we did he left for Facebook to work on the growth team. His next stop was Twitter to start a growth team and run it a couple of years.

Then he became a VC at Greylock, joined the board of Medium, invested $20 million in Discord and joined their board.

So I pitched him on Cake, proposing he invest $5 million in seed and joining the board. The pitch went great, he seemed to love it, asked great questions and you could tell he really got it and saw the potential.

But. Greylock doesn't do seed. So he told us to just get a little traction and then come back when we had, and he would place a bigger investment, which Greylock likes to do and he had done with Discord. So that became our mantra: just get good conversations and a little traction on a budget.

Josh and I stayed in touch, but a short while later he went to Robinhood, became completely immersed, and stopped writing checks for Greylock.

I always wonder what would have been if he had invested and joined our board.

and now this

Apparent suicide by 20-year-old Robinhood trader who saw a negative $730,000 balance prompts app to make changesThe family of a 20-year-old student says he died by suicide after confusion over an apparent negative balance of $730,000 on his Robinhood account. Now they are demanding answers from the millennial-focused trading app.amp.cnn.com