Robinhood versus Wall Street – A Robin Hood Tale? Perhaps even before the 2008 Global Financial Crisis there was resentment towards the financial services sector; it certainly increased afterwards with the sense that unethical greed by a rich few had devastating impacts for a great many who had their lives ruined just because they had, for instance, got a mortgage. And then they had to watch as the very same perpetrators were bailed out by the government using tax payers’ money due to being ‘too big to fail’.

The nature of the GameStop story where individual retail investors, now with more power through being interconnected through fora like Reddit’s Wallstreetbets, can flex their collective might against the companies that have traditionally been the market manipulators,  has brought a sense that, at first glance, there was a moral element to their actions: retribution against Wall Street`s perceived lack of ethics.

‘The flip now is that there are more retail investors that have formed a more formidable community hitting Wall Street where it hurts, with their corrupt ways’,  as one retail trader told Tradeguider.

And a caller to The Anthony Cumia Show with Dave Landau in January 2021 expressed what others feel when he said he was happy to see hedge funds getting hammered.  ‘I don’t like somebody betting against companies, hoping someone is going to fail,’ he said.

Socially Responsible Investing (SRI) using Environmental, Social and Governance (ESG) criteria

Then there is the formal side of what is ethical investing – impact investing where traders can screen out companies which don`t measure up well against criteria such as deforestation, animal testing, farming methods, nuclear power, genetic engineering,  energy usage, diversity policies, transparency standards and more.

Traders also do positive screening - looking for companies that have good ESG practices or ethical investment funds that select investments with a low environmental impact, high social conscience  and high-quality corporate governance.

These are subjective judgement calls. Some might consider military stocks unethical while others might consider adult entertainment to be wrongly penalised as a sin stock.

It requires a lot of thorough research in a space where metrics are not standardised.  For example a multinational with complex operations may do well on energy usage in one region but have poor practice elsewhere. This goes for individual stocks as well as funds that cover ESG investing. Continuous screening and monitoring have to be done.

That said the metrics show that this kind of trading is becoming more mainstream. UK fund manager Hargreaves Lansdowne found that money held in UK ethical funds quadrupled between 2008 and 2018 while several studies  (including one cited in the afore-linked article) find that younger investors prefer ESG opportunities.  Figures from Morgan Stanley (cited in articles like this) find that 82% of High Net Worth (HNW) millennials versus 45% of all HNW investors overall invest in ethical funds, even though the size of the market might still be small compared to mainstream investing.

So it would seem that a growing number of people want their money to fuel businesses and activities that they consider to be worthy, that do good for society and the planet. 

But markets are always manipulated…

Yet markets have always been manipulated and still are, so just by being an active trader we are part of a system in part underpinned by underhand behaviour, even if we don`t engage in it ourselves. 

And while some people saw 2021’s Reddit meme stock rebellion as a modern David and Goliath story, others such as US Senator Warren and Interactive Brokers Chairman Tomas Peterffy (in this and this video), saw it as old-fashioned market manipulation, albeit with retail traders newly at the helm. 

Meanwhile there’s been some discussion as to whether hedge funds had planted posts on retail message boards to manipulate behaviour too. Even if some of the shenanigans described in this SteadyTrade Podcast video by a former Vancouver-based market maker-now-retail trader JJ Gorilla are a thing of the past, `unethical` market manipulation is still alive and well, albeit taking on new forms.

For instance, Youtuber Sam Alexander worries that the twin rise of content creators influencing opinion with a ‘flood of inexperienced and eager’ retail investors looking for a quick return using platforms like Robinhood and Weevil,’ has also  spawned the sponsored investor influencer’.

While Alexander has nothing against legitimate sponsorship or advertising, he recounts how he was approached by an investor relations firm who wanted him to make videos being bullish about small market cap companies of their choosing, passing off their talking points as his own opinions, and having final approval on the video.

Content creation doesn’t yield a lot of money and he shared that it wasn’t easy to turn it down the 1000s of dollars being offered per video. But, ‘where the company is small enough, it doesn’t take many investors to have a dramatic change in stock price`, he says,`because of the influx of relatively inexperienced investors who are looking to their favourite Youtubers for guidance…..the hype works and people buy in. Then the investor relations firm can sell their stocks for massive profits and the content creator is proven at least somewhat correct because the stock they recommended as a buy just jumped up’.

It’s a classic pump and dump for the social-media era.

But we do need the big players to move the markets      

The big hedge funds and banks engage market makers expressly to move the value of an instrument up or down to suit their goals.

A market maker is an individual market participant or member firm of an exchange that also buys and sells securities for its own account, at prices it displays in its exchange`s trading system, with the primary goal of profiting on the bid-ask spread - the amount by which the ask price exceeds the bid price a market asset.

The markets don’t work without them as they take the other side of our trades and provide liquidity.

‘Otherwise what would happen is,` explains former market maker JJ Gorilla in the SteadyTrade crew video cited above, `If you went to buy a $5 stock and there was no market maker providing liquidity, you’d get 105, 105.20, 105.30, 105.50, 106 because there’d be nobody willing to sell it to you.’ 

‘Shorting to retail is one of the most misunderstood concepts that retail traders have,`he continues.  `The market maker’s job is to short it to you. He’s not doing it because he’s malicious, he’s doing it because he can get your stock at the price you want. Now that entails risk so the market maker is at risk on that stock and he has to go to the bid to cover. They do this millions of times a day.’

Market making is legal but there is sometimes a thin line between that and moving the market up and down by using rumour, media distortion, naked short selling etc. This manipulation can be difficult to prove and often manipulators don’t encounter any retribution. If this incontrovertible fact about the financial markets doesn’t sit with your ethics then perhaps you need to move to long-term investing as there is simply no getting away from it.

But some argue that there is an ethical responsibility to do short-term trading

However, countering the argument that anything other than long-term investing is immoral, Youtube content creator and trader ClayTrader is one who makes a case for a moral imperative *to* trade the markets short term. He explains that if you take the example of a long-term investor who has been saving for 45 year, who has worked hard, been law abiding etc but is now retired and needs money for that – he raises the idea that she deserves the best price for her stocks, her effort.

‘I would guess that 95% of people watching this video would [agree]’, he says. ‘To get the most efficient value for that stock, you need traders in the market’, he says. Without them there wouldn’t be that many buyers and sellers and, ‘when you don’t have as many people in the market, what happens? Prices become a lot of more volatile`, he says.

Whereas, he continues, ‘the more participants in the market, the more efficient it becomes….and efficiency is what is allowing best price…..if you eliminate traders, what happens? You lower… the number of players [and this includes, he adds, supercomputers and algorithms] – you are now making the market less efficient – you are no longer getting the best possible prices when you go and see a stock.’

There is a logic to this argument, even if it does rest on the basic premiss that long-term investing is ethical.

But doesn`t one person’s gain comes at another person’s loss?

Staying on the retail side for a minute, for those that wonder if day trading is ethical, let`s consider the idea that there will be someone on the other side of your trade who has lost so that you can profit. 

And not just 1 trader - as the late Tom Williams, originator of VSA, once said, the market needs lots of losers so that the winners can win and it’s generally recognised that the ratio of losing trades to winning trades is about 9 to 1.

However Darrell Martin at Apex Investing writing for Benzinga argues against the idea that for someone to win, someone else has to lose as being a problem. ‘Yes there is always someone else on the other side of the trade, but that person changes all the time.’ 

In the retail sector that may be true, but on aggregate 90% of retail traders are losing money overall; the people who are not losing money are the professionals, at least until the GameStop saga.

But even then, as this Quartz article points out, even bringing down hedge funds hurt the `regular person on the street` as well.

“Whether or not the Reddit crowd’s trading of GameStop shares will meet a legal definition of market manipulation, it’s clear that some hedge funds have suffered serious damage. One of those is Melvin Capital, which got burned on its short position in GameStop.But here, too, it’s worth asking who exactly is being punished: Melvin generally manages money for “charitable organizations like endowments and foundations,” according to Bloomberg’s Katherine Burton and Hema Parmar. It’s common for hedge funds to manage money for the pensions that regular people rely on for retirement, showing that wealthy hedge fund managers aren’t the only ones hurt by market distor tions.”

Here is another fundamental aspect to trading the markets which you have to be aware of if you are aiming to be an ethical trader.

Summary 

So what to do in the face of all these opposing takes on whether trading is ethical?

The first is to recognise that ethics in themselves are not universal, objective rules: while most humans can agree on overarching principles that prescribe ethical behaviour, when it comes down to the day-to-day minutiae of decisions, then it`s about comparing external realities and our individual actions with our individual credos. 

So for some people, trading is the worst of a capitalistic system - bringing individuals or companies down without concern for their wellbeing or what is right, not helping to build anything in society - and they wouldn`t engage at all.

While others see an ethical path through the winding landscape of choices, once they`ve accepted that it might never be a fair game. 

So unless you have a capitalistic critique of trading in general, then it`s about picking your own way through, using your own moral compass as a guide. Though it’s always worth broadening your focus out from your trading platform to consider the wider socio-economic and political impacts of what you are doing.

And, as Gavin Holmes, Tradeguider CEO, says, stay skeptical and make your own choices based on your own priorities and interpretations.

‘There’s a lot of unethical players in the market,` he says, `but there’s a lot of ethical players too.`

And then as the true Wyckoff VSA advocate that he is, he adds, `The truth is in the chart.’

Sources

Sen. Warren on GameStop frenzy: We need clear rules on market maniuplation - CNBC

Gamestop buying halted - Interactive Brokers Chairman market manipulation live on TV - - ed3dfx

Are WallStreetBets Reddit traders manipulating GameStop shares? - Quartz.com

GameStop mania: why Reddit traders are unlikely to face prosecution  - Financial Times

5 things you need to know about ethical investing - Wealthify.com

StocksToTrade - Ep 179: Former Market Maker Shares Must-Know Trading Secrets!- StocksToTrade

A Moral Problem with Trading the Stock Market? - Clay Trader

Why ethical investing may be harder than you think - Killik & Co

Youtubers are participating in stock market manipulation - Sam Alexander

WallStreetBet`s market maniupulation/Stonks - The Anthony Cumia Show w Dave Landau

Is Someone Losing When I`m Winning?  - Benzinga

Guide to ethical investing - Times Money Mentor - The Times

Beyond the greenwash – ESG’s identity crisis - Expert Investor Europe