The events of the past week put the spotlight on retail investors’ influence in the US equity market.
While January’s drama was orders of magnitude more intense than that witnessed late last summer, it’s worth recalling that tales of increased retail participation and stories of previously esoteric concepts being “weaponized” by suddenly enlightened collectives on Reddit, did land above to digital fold on multiple occasions in 2020.
Now, with GameStop’s meteoric rise, we’ve hit peak public interest.
Every major news outlet in America covered the story last week. It was even lampooned on Saturday Night Live. The WallStreetBets story (complete with the short seller angle and Robinhood’s role) are a bonafide national scandal. The House Financial Services Committee is set to hold a hearing on February 18.
Against this backdrop, it’s worth taking stock (no pun intended) of how high retail’s contribution to volumes really is these days.
US cash equity and single-name option volumes hit record highs in January, and as Goldman’s Alexander Blostein wrote Monday, “retail contribution to volumes is likely larger than perceived.”
Thanks in no small part to retail participation, activity is up 100% YoY (left figure, from Goldman, below).
Blostein went on to write that “single name option volumes have also nearly doubled so far in Q1 2021, to 42mn contracts in ADV with a materially higher skew toward call buying at ~71% QTD versus the low 60%’s historically.”
That latter bit is notable. Since the second quarter of 2020, single-stock options volumes have trended more and more heavily in favor of calls. Over the same period, single stocks have comprised a larger and larger share of total US cash equity volume (compared to ETFs).
While I still contend it’s totally implausible to suggest that poor and lower-middle class Americans are spending their stimulus money on GameStop shares, the timing of these trends likely isn’t coincidental. It probably wouldn’t be a terrible idea to lower the income threshold for the next round of checks, especially considering what we now know about employment trends for those making $60,000 or more.
If you’re wondering whether institutional investors are contributing to the trends illustrated above, the quick answer is “no” — or, at the least, they’re probably not “responsible” for the massive increase in volumes.
“While we estimate that direct retail contribution to US cash equity volumes is tracking at about roughly 30%, we believe additional indirect activity by systematic trading firms and electronic market markers in both markets further contributes to the overall US cash equity volumes – amplifying the retail effect,” Goldman went on to say, before noting that on their analysis, “long-only institutional trading trends appear to be fairly unchanged with recent history, suggesting this part of the market was less of a contributor to the industry-wide surge.”
So, these are your markets, folks. Gunslingers from WallStreetBets “playing” Robinhood like Candy Crush, in an increasingly quixotic effort to find new ways to score points against an elusive “establishment,” and all with little to no conception of how their own order flow feeds the very beast they’re trying to kill. Meanwhile, the starchy, staid long-only institutional crowd can only look on incredulously as the world passes them by at 5G.