The Worst Gambler Ever

Reclaimed Hops 5

When I first started looking at markets post-2008, finance still had that veneer of an élite, highly skilled, rigorously mechanical profession that had lost its way. Generally, I think everyone still held the view that factors such as the economy, future cash flows, earnings, news, corporate activity, and other “fundamentals” heavily influenced stocks, if not outright deterministically moving them. By the time I started trading in 2014, this image had been distorted in no small part due to certain internet trading communities I found. I started betting on phase 3 trial outcomes, trading weekly expiries (FDs) well before zero-day trading was even a thing, tried to capture dividends, and moved into technical, short-term trading, because it didn’t logically compute that a billion dollar company like JetBlue’s intraday stock price (which was the first stock I purchased) would be impacted by its business activities — the timeline simply didn’t match up.

I wonder a lot about how pure speculation in that fashion became completely mainstream — beyond crypto, zero days, and sports, now “prediction markets” exist for everything under the sun, where you can trade binary options on that anti-aging oddity Brian Johnson’s next sperm count or construct a proxy probability from public markets of how likely Biden is to make it to his next term:

The binary option structure is particularly odd because binary/digital option trading has historically been heavily restricted from retail in the US due to the all-or-nothing nature and the complexities of pricing these options. (Consequently, they’re very useful for modeling singular event probabilities over time — delta sensitivity to the expiry date, like, say, an election in November 2024, would be really low right now in a binary option — why would a floating probability be useful in any way?) But an over/under sports bet, or a money-line, or a prediction market on a certain event, are all essentially binary option trading patterns as they fluctuate over time. For all intents and purposes, this is just the meta now.

I’ve concluded that Robinhood is probably the most important company of the post-2008 financial world. Their “democratization” of finance pushed the “don’t ask don’t tell” nature of trading as skilled gambling from pre-2008 investment bank trading desks to the general population in 2017 after everyone knew exactly how those bankers were trading:

Take, for example, the institutional trading activities that led to the Volcker rule — prior to it, traders at banks were regularly (implicitly) allowed to bypass leverage limits so long as they made money. The upside? Make a huge trade, collect a massive cut as a bonus. The downside? No big deal! Get fired for violating risk policy, and maybe take gardening leave and find a new job.

Robinhood took a particularly distasteful approach of combining tech’s Skinner box (see: The Gambler Walks into a Psychologist’s Office 8/2/23) gamification with round-the-clock markets and instant options approval. (I remember having to go through 3 phone calls and quick tests with my retail brokerage in 2014 to even sell cash-secured puts.)

The accusations from Massachusetts center on the tactics that the company uses to keep customers engaged, claiming that it “encourages customers to use the platform constantly” through what it calls “gamification.” The complaint alleges that, through the promise of free stocks, push notifications and its signature digital confetti, Robinhood encourages “continuous and repeated engagement with its application.” State regulators allege Robinhood allowed one customer with no investment experience to make more than 12,700 trades in just over six months.

The advent of Robinhood combined with pandemic markets truly warped trading forever, which has extended into what I call “shitcoin nihilism”: of course it’s pointless how things trade, but there’s a 10x to be made, so why dwell on it? (Dwelling on it naturally leads to oversocialization and a fatalistic outlook on life.) I mean, just look at this:

While I think the progression of tech and securitization would have inevitably led to this point, my core worry is that the zero-sum nature of HFT (see: Speed Racing, markets edition 12/15/20) is now the entirety of society competing for the same dollars:

In finance, good ideas are like good restaurants. They come around once in a while, and are enjoyable as long as the people you dine with keep mum, and then all of a sudden, it turns out the entire yuppie population of Manhattan saw it on some blog or video due to some writer/creator who couldn’t keep their mouth shut to not ruin a great thing for the sake of engagement, and suddenly there’s an 8 month long wait to get in.

Well, when there’s a million “restaurants” vying for the same dollar wagered in the same stupid fashion as everything else, everything just gets annoying and dumb

Any bettor or trader who wants to make money will obviously have some concept of Kelly criterion, a way to mathematically optimize your bet sizing that balances out a bad string of variance that would otherwise bankrupt you with optimizing your future expected winnings. But if we expand this to a societal scale and note that crypto, prediction markets, options, sports betting, and casinos are all competing against eachother, there’s a real worry from me that people are going to lose money too quickly and everything dries up creating unsavory consequences.

Almost immediately after I wrote my gambling post (see: Don’t Ask, Don’t Tell 3/20/34), the Ohtani scandal broke. Initially, I thought that there was something very suspect about a translator gambling away $4mm — surely someone had to notice and there was more to the story? Well, not only was there more money stolen — the true amount was ~$16mm — but what came out was the most psychotic gambling addiction in what I think is the worst sports bettor I’ve ever seen. (And I’m convinced Ohtani had nothing to do with it.) Here’s some excerpts from the full complaint:

Not even controlling for sports seasonality, this is an average of ~24 bets a day. I genuinely don’t know how it’s possible to place this many straight bets in a day; arbitrageurs I know don’t often hit this volume with this size. (Note something that Kelly would prevent — this obvious downwards spiral of betting an average, betting way oversized in a hot/cold streak to try and amp up winnings/win back losses, and punting your last 10 bucks after major tilt.) The numbers are astonishing: participants in a book are obviously distributed in size, and whales are rare. There is a good chance Ippei (the translator) was a massive amount of volume in the book. 19000 is also a large number of bets: his rate of return (40mm loss on 324mm bet) over his activities was ~-12.5%. If you just randomly bet money lines (roughly 50/50 bets), your expected return would be the vig (around -2-4% depending on book and line). This is the worst pound-for-pound volume betting I’ve ever seen. (Note that combiner bets and parlays do have more house edge if you’re not doing it correctly, easily clearing double digit edge for the book. But it’s hard to bet actual size on many-leg parlays — the most degenerate bets — because of the tail risk that an 11-leg parlay actually does hit.) Somehow, it gets much worse. It starts with market availability:

This is how people get hooked — not by outright money, which is straightforward (cannot withdraw more than you have), but credit. A running credit line is a risk in and of itself to manage, and in these underground bookie situations where there isn’t a set interest rate indicative of the risk (but rather an implication that you pay up or bad things will happen to you), the entire point is to hook you to an endless payment cycle in the illusion that your betting will finally pay off your debts (which is the subject of many, many famous movies and books.) The thing is, if your rate of return isn’t even break-even, let alone positive, you factually cannot pay this back over time through legitimate activities, which is why a major part of gaining secret-clearance is the financial stability check. Unlike spiraling credit card debt, you can’t declare bankruptcy from illicit gambling debt — they will track you down.

Of course, it gets worse.

Regulation in finance (and a big reason why crypto took off) requires that moving money around electronically is heavily monitored and regulated, especially internationally. The addicted gambler is a credit risk — much like my fundamental theorem of trading (a theoretical price is only worth what you can get a fill at), losses on credit are only worth what you can collect from it. Addicted gamblers obviously aren’t the best with money — “payment issues” are more likely to be from having gambled ahead of the next paycheck rather than actual processing issues. Here, it seems to be both. (Not coincidentally, a “bump” is an extension of the credit line in the same way that one is offered a “bump” of cocaine — first hit is free — from a street dealer.) Addiction and desperation creates a negative feedback loop — each makes the other worse.

Ippei obviously is self aware that he sucks at this thing, but of course, he’s well in the red and doesn’t know how much he owes or how fast he needs to pay it off. The frequencies of the bump and whining about losses increases as a result:

First of all, this bookmaker is an idiot for extending this much credit this fast. How did he possibly think that it was realistic to collect 8 figures in losses from a translator? (Presumably, he would initially have been of the opinion that there was some bigger bettor going on, but at this frequency? With this desperation in texts? Come on.) Ippei, naturally, is doing something very sketchy to make payments. This is the absolute worst gambling addiction I’ve ever seen. I have personally known some absolute degenerate gamblers who begged for money and bitched about losses in the same sadly self-aware way, but going back-to-back-to-back for bumps in this amount in a hopeless death spiral is truly awful. Once it’s revealed how he was getting the money, you realize why he couldn’t just abruptly bail to Japan:

He was also hiding the account from Ohtani’s financial advisor and taking his meetings for him (because he was the “translator”. Who knows if he was just making up the communications all along?

It’s like roaches: when you see a public case, you know there’s thousands more lurking around somewhere. If this addiction can happen to the proxy of the best baseball player ever, to NFL and NBA players, how quickly are the losers losing, and given inflation and other headways, are people even making enough supplemental income to keep making the payments? I talked about the concentration in the AI trade, but this is the other extreme concentration — the attention economy is so critically dependent on gambling sustaining itself. I doubt Kelly is taken into account by the vast majority of bettors. Something has to give, and I suspect it’s along the same timeline I had for the AI trade:

AI actually does create a cross-industry, revolutionary application (<3 years is my timeline) or if it doesn’t (more likely imo), the entire tech sector’s air lets out.

The acceleration of gambling scandals makes this timeline seem conservative to me with regards to the attention economy. The same conclusion is made

The long and short of it (heh) seems to be that you don’t have to tune in, but you certainly can’t tune out. We are, in fact, all trapped in the same regime.

with one additional caveat: don’t gamble on credit, folks.