When millions of individual stock pickers took on Wall Street— leading transaction volumes to surge in January—some didn’t see it coming. Now that the new generation of traders is driving so much of today’s equity flows, established industry players are asking what their participation means over the long haul.
The galvanization of these “retail” investors has captured the market zeitgeist in recent months, as huge volumes of trades were effectively crowdsourced from social media chat rooms. Their activity has prompted eye-popping moves across dozens of low-priced stocks that were either thinly traded or virtually moribund.
Fueling the behavior are discount brokerages now offering commission-free trading; technology that is making it easier to transact from anywhere on a mobile phone; and a pandemic that has caused a spike in day-trading. Some have seen huge windfalls; others crushing losses. Several investors in both camps have been reluctant to cash out.
Moreover, the retail participation is much broader than initially reported, according to market participants. The activity has already targeted dozens of stocks across multiple sectors. It involves large numbers of retail investors who have opened zero-commission brokerage accounts. And the activity has been underway far longer than many might suspect.
The proportion of retail flow on equities exchanges is thought to be higher still. Last July, Joseph Mecane, Head of Execution Services at broker dealer Citadel Securities, told Bloomberg that retail investors accounted for as much as 25% of U.S. equity trading on busy days, up from 10% in 2019. A spokesman for Citadel, which handles approximately 40% of U.S.-listed retail volume, declined to provide an updated figure, stating that recent trading “was too volatile [and] likely an aberration.”
The trend started last year, with the onset of COVID-19 creating a larger population of day traders, who could buy and sell from their mobile phones, trade algorithmically, or even use large amounts of borrowed money. Retail flow has played a large part in driving the price action in U.S. equities ever since, although participation has been outsized since the middle of 2020. Lately, it has spread even to cryptocurrencies, as evidenced by the interest surrounding Coinbase Global, a cryptocurrency exchange, which conducted a direct listing in April.
“The psychology and sociology of this relates to the pandemic and mom, pop and millennials having access to institutional technology,” Ron Hooey, Head of Institutional Equities Sales at BNY Mellon. “It was the perfect storm for all of this retail frenzy to occur, and it’s going to impact transparency.”
Much of the commentary on meme stocks has portrayed the group of retail investors as a relatively small group of activist millennials, using social media to successfully squeeze hedge funds out of their short positions. But data from Cboe show that retail trading is much broader.
Participation is not concentrated solely in the 15 or so headline-grabbing names that initially dominated the coverage. It has evolved to cover at least 50 names, based on the number of companies in which online brokerage Robinhood Markets restricted trading on January 29 at the height of the meme stock mania.
Many hedge funds were short GameStop — Melvin Capital Management, most transparently — but once the potential to execute a short squeeze in the position became widely known, institutional money flooded into GME too.
The surge in meme stock investing has not been reflected in trading volumes for traditional retail passive investing vehicles such as exchange-traded funds (ETFs) and mutual funds. In the fourth quarter of 2019, ETFs accounted for about 12% of total U.S. equities volumes, but by the fourth quarter of 2020, they had fallen to about 6%, according to Cboe.
As the second quarter gets underway, retail investors appear to be taking a breather (see figure 2), perhaps because there are now more distractions with restaurants opening back up and COVID-19 vaccines being rolled out. Average daily volumes of shares transacted as of mid-April have fallen 38% from their 15.6 billion January average, according to Cboe. Despite this pullback, experts say the new set of traders are more educated on investing and will remain a force in markets.
A number of obscure names that have drawn the attention of retail investors in the sub-$5 range have seen their valuations explode this year as a result of retail interest. Relatedly, they have sparked interest in stocks priced below $1 – the so-called “penny” stocks.
“Around August 2020, principal dealers began to receive a lot of order flow from retail investors looking to buy stocks trading below $5, whereas that kind of activity was in the low single digits pre-COVID,” says Adam Inzirillo, Head of North American Equities at Cboe.
The breadth and extent of the interest goes beyond U.S. equities, too, taking in stocks such as U.K.-based Critical Metals and Canada-based Sundial Growers. Stock analysts at Cboe observe that overseas retail flows have entered the U.S. market though international retail brokerages such as Interactive Brokers and Webull Financial.
Liam Magrini, a 21-year-old music production student who lives with his mother in Brooklyn, saw the chatter about shares in GameStop (GME) “going to the moon” on the Reddit WallStreetBets discussion board in early January and — against the advice of friends — invested $100, when the stock was priced at $54.
Fellow Gen-Z investors were encouraging people to hold on to their positions, no matter how wild the ride. “GME was about to blow and Robinhood was on the front page of the App Store,” he recalls. “Diamond Hands was all you heard, all the time,” he adds, referring to a “meme” culture phrase to applaud personal fortitude in holding a stock amidst volatile trading.
Between Jan. 25 and Jan. 27, the peak price of GME, his then-$922.26 investment had risen to $5,553.19 (see figure 5). He decided not to borrow money from Robinhood on margin, although it was offered to him, and cashed out on March 10, when the stock was at $265 and the position was worth $4,374.54.
He says it gave him a taste for more sophisticated investing. In February, he started investing in a 2x leveraged oil and gas ETF offered by Direxion (GUSH), which delivers twice the daily gains or losses of the S&P Oil and Gas Exploration & Production Select Industry Index. “It just so happens came in at the right time,” says Magrini. “I don’t know too much, so I don’t want to push my limits.”