William John Market Report 07-10-21
William John takes a look at the rise of retail investment and its role in modern financial markets.
William John, Retail Traders, Retail Investors, Financial Technology, FinTech, WallStreetBets, Robinhood
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William John Market Report 07-10-21

William John Market Report 07-10-21

Category: Reports

As technology has evolved, many aspects of life have been economised. Why ring a taxi when you can order an Uber? Why print off your boarding pass for a flight when you can have it on your phone? Why have a heart check-up when your Apple watch is constantly monitoring your heart health for you? These questions are, of course, rhetorical. A less glamorous area of life that is nevertheless important that has been revolutionised by technology is finance. 

Whether personal or private, commercial, or corporate, technology’s applications to finance are shaping our monetary future. Some technologies are undoubtedly positive sum contributors. Such examples include software that executes trades on securities exchanges, personal banking applications and blockchain technology that is decentralising the way peers interact in the financial world. 

Looking at this issue from a bird’s eye view – technology has allowed people to finance themselves and their businesses in innovative ways that predecessors would have dreamed of having. Taking this a step further, it has enabled many participants that were previously unable to engage in the financial markets to do so. The traditional means of employing brokerages or having large sums of capital to engage in public financing or investing are no longer necessary and as such the “retail” market of investors, that is, those who are not finance professionals that tend to invest smaller amount of capital than their institutional counterparts, have emerged as both a major demographic and a major player in the financial markets. 

This particular consequence of technological innovation is paradigmatically and existentially important for the future of the financial world. Yet its ethical and practical merits for finance are still unclear relative to the overwhelming positive contribution that its enabler has made. 

Considering the ethical nature of retail investment, the definitive being of “non-professional” implies that such participants do not have a full or robust understanding of the market forces they are engaging. A prominent example of this sadly occurred in June 2020 when a 20-year-old trader called Alex Kearns took his own life believing that the platform he was using had exposed him to millions of dollars of losses whilst he was trading options when in fact he had misunderstood the numbers completely. 

Expanding this microcosm, numerous academic studies have pointed to the fact that professional stock pickers and retail investors alike lose money over the long term. Specifically, 85% of professional money managers fail to meet their benchmarks over a multi-year period according to CNBC. Concerning retail investors, a study entitled “Attention-Induced Trading and Returns: Evidence from Robinhood Users” concluded that Robinhood users generate abnormal returns of  -4.7% over a 20 day period for the top stocks purchased on the platform that day. 

Setting the ethical question aside, retail traders have had an impact on markets, notably exhibited by the WallStreetBets phenomenon that occurred in 2020. Looking at the monthly stock price of GameStop corporation (see next page). 

GameStop (GME) was a company targeted by institutional short sellers believing the business to be in a fundamentally distressed position as a brick-and-mortar game retailer. In retaliation, retail investors who took the view that short selling (and betting on the failure of companies) was unethical, coordinated their investment to short squeeze the institutional investors on a social media platform called Reddit and sent the stock price of GME skyrocketing. 

Whilst the company’s stock price has settled from a high of $325 in January 2021 to around $175, it remains substantially higher than the price of $18.84 recorded in December 2020 since the WallStreetBets phenomenon. This is just one example of “meme stocks” that have benefited from an affection from retail traders, and if these companies are able to sustain high stock price multiples as a consequence (as observed with GameStop) this could enable companies to recapitalise their companies and evolve their businesses – a facility only made possible through the emergence of retail traders via technological innovation.

Source: William John Analytics, Yahoo Finance

However, whilst there is potential for upside as described, “pump and dump” schemes, market manipulation and asset bubbles are equally likely outcomes form increased retail investor influence. 

Clearly, regulators and markets will need to address how to interact with the retail zeitgeist. Financial education is paramount and speculative vehicles, whilst an essential component of financial markets, need to be structured and limited. Similar situations to Alex Kearns should not be enabled by financial services of any kind, and mass market behaviour that produces no positive sum outcome should be regulated and monitored – especially given empirical studies so far conclude an overwhelming majority of market players lose money. How this will be achieved is too early to say, but what is for sure is that retail investors are here to stay. 

Any opinions expressed in these documents are those of William John and are provided for information only. E&OE.