The retail trading revolution

Retail traders are rewriting the rules of the market. While their influence on “meme” stocks like GME and AMC, and more recently the DORK stocks, have forced institutions to take them more seriously, their impact isn’t strictly limited to what’s trending on r/WallStreetBets. Retail now accounts for about 20% of total trading volume, compared with less than 15% for hedge funds.

In the original GameStop frenzy, traders sought out a stock that was heavily shorted by hedge funds, but in an about-face, now they’re forcing institutional investors into trading their favorite stocks. This week, for example, Goldman Sachs strategist John Marshall told clients to buy large-cap stocks with elevated retail activity, like Palantir Technologies and Advanced Micro Devices.

Retail traders are also playing a key role in fueling a stock’s price movement at a time when every investor’s eyes are on them: quarterly earnings.

Analysts from JPMorgan have identified the substantial retail activity that’s associated with massive earnings reactions (as shown in this chart).

But it’s not always the case that retail is contributing to (or creating) the obvious trend in response to earnings. Sometimes the crowd is buying the dip after a stock nose-dives post-earnings.

Analysts at Bespoke Investment Group noted that more and more of a stock’s overall performance is driven by immediate reactions to earnings, as stocks average a one-day absolute share price change of 7% after reporting.

The Takeaway

As institutional investors shift their strategies in response to retail traders and retail traders drive off-the-charts volatility with their earnings plays, it’s become less clear who is a sheep and who is the shepherd in traders’ herd mentality. Retail traders are now such a market-moving force that institutional investors are chasing their trades, flipping the narrative.

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