17 Feb Is Retail Investing on the Wane?
The year 2021, witnessed retail Investors asserted their dominance in the Stock Markets with GameStop, a stock that was struggling after hitting historic lows of under $4 per unit since past two years, witnessing a miraculous resurgence, aided by the users of a Reddit forum named “r/WallStreetBets”. Collective buying from over 2 million of the group’s members had pushed the stock price to an unbelievable high of $347.51, a 900 percent increase in a matter of a few weeks. The stock currently trades at around $120.
The rally had prompted several trading platforms to limit trades in the GameStop stock amidst concerns about issues such as stock bubble, overzealous trading, investor protection and market manipulation. However, the interest seems to be waning, with retail trading volume having peaked in January 2021 at almost 27%, according to data shared by the Securities and Exchange Commission.
The Emergence of Retail Investing
The year 2021 easily belonged to retail investors as they generated as much equity trading volumes as mutual funds and hedge funds combined as per a report by Deloitte. Some of the reasons attributed to the frenzy are the emergence of online trading platforms that demystify trading, adopting measures such as making it commission -free, no-minimum investment requirements and introduction of fractional shares trading that result in a highly empowered trader, who has access to real-time information, and revels in breaking conventional trading approaches.
Now a note by JP Morgan states that retail investors’ influence over the stock markets is declining, as risky meme stocks fall out of favor, for more conventional equity funds. There has been a decline in share of stock market transactions across retail brokerage firms such as Robinhood, which fell to levels seen before the pandemic. The same trend was observed on other brokerage firms like E*Trade and Schwab.
The Tide is Ebbing
The pandemic saw a steep rise in retail investing and emergence of retail forums on such as WallStreetBets, which can be attributed to the lack of other avenues of entertainment such as gaming and plenty of time on hand due to lockdowns. A community of 1.5 million subscribers in 2020 grew to nearly 11 million, but the growth seems to be slowing down. Stocks which skyrocketed without any apparent fundamental reasons and generated whopping returns for the investors have lost most of their gains, with investors returning to equity funds, ETFs and mutual funds. JP Morgan also notes that there is a significant decrease in call option buys which continue to fall year-to-date.
Robinhood, which made its IPO debut last year became the hotbed of retail trading activity, with retail investors using the commission-free online brokerage to create “Meme” stocks such as Gamestop and AMC Entertainment. A look at the monthly active users should give us a fair idea of the trading frenzy. The MAU count that stood at 11.7 million at the end of 2020 grew to 21.3 million at the end of June 2021. The Company made its debut at the stock markers with an IPO in July, achieving a stellar valuation of $31.8 billion. However, the stock is down more than 80% from its 52-week highs.
Lower trading volumes, stringent regulatory scrutiny and a potential crackdown on Payment for Order Flow (PFOF) are some of the problems plaguing Robinhood at the moment. The Company’s average revenue per user slid to $65 per user in Q3,2021, from $137 in the first quarter of 2021. The Company is seeking to expand its product offerings, especially in the face of the stock market volatility caused by rising interest rates and a threat of war between Russia and Ukraine.
Changing Directions in the Face of Uncertainty
Rising interest rates could curtail trading in retail stocks as customers seek more safer assets, which will further bring down retail trading volumes. Robinhood is now seeking to introduce a wealth management tool, retirement accounts and IPO investing as a means to diversify its product offering.
Another note by Vanda Research hints at investment fatigue plaguing retail investors, with fading enthusiasm for “meme” stocks and growing interest in electric and metaverse stocks. Tech Sell-off from retail investors affected even retail favorites such as Tesla Inc (TSLA.O), Apple Inc (AAPL.O), Advanced Micro Devices Inc (AMD.O).
Conclusion
Retail Investors are here to stay! However, what is left to be seen is whether they are able to bear a significant influence on the markets in the coming days. More importantly, it is time for action for market players like regulatory authorities, brokerages, and market makers to take a closer look at their policies, product offerings and supervisory practices to protect investors, reduce risks and ensure fair market practices.
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