Five years after GameStop mania, retail investors are reshaping markets

The Rise of Retail Investors: A Lasting Impact on Wall Street

Five years after the GameStop rally, the influence of retail investors has proven more durable and long-lasting than many expected. What began as a dramatic short squeeze in early 2021 has evolved into a persistent force in equity markets, reshaping trading dynamics and providing a steady source of dip-buying flows of cash that helped underpin one of the longest bull markets on record.

According to Tom Lee, head of research at Fundstrat, “Retail investors were always signals to me. When they were buying dips, the bull market was healthy. From 2009 to 2020, institutions acted like retail didn’t exist. That changed completely after 2020. Retail investors are difference-makers. They can move markets with size and conviction.” Fundstrat’s flagship exchange-traded fund exceeds $4 billion in assets, demonstrating the significant impact of retail investors on the market.

Increased Participation and Influence

Before the pandemic, retail trading accounted for only a small fraction of daily equity volumes in the U.S. However, with lockdown-era government stimulus payments, zero-commission trading, and social media-fueled coordination, millions of new investors entered the markets. On average, individual investor participation in U.S. equities has risen to nearly 20% of daily trading volume, up from low single digits before Covid, according to Jeff Shen, co-chief investment officer and co-head of systematic active equities at BlackRock.

Steve Quirk, chief brokerage officer at Robinhood Markets, noted that on high-volume days, retail participation in equities could shoot up to close to 40% and, on the options side, as high as 50% of volume. This increased participation has led to a shift in the way hedge funds and short sellers approach the market, with many scaling back short exposure and diversifying portfolios to avoid becoming targets of coordinated buying.

Respect from Institutions

Hedge funds have learned a painful lesson from the GameStop saga and now recognize the power of retail investors. As JJ Kinahan, head of retail expansion and alternative investment products at Cboe Global Markets, said, “It’s just so great to see that dumb money moniker go away, and then to get respect from the institutions. Professionals learned a lesson from the tenaciousness of the retail investors who believe in companies and continue to buy them.”

Ivan osović, founder of Breakout Point, a firm that tracks retail trader activity on discussion boards, added, “To many professional investors, retail traders have become that annoying TV-series villain who never quite gets written out. Now, five years in, it’s basically the fifth season of the show, and somehow they’re still in the cast.”

Wealth Transfer and Demographic Shift

Retail’s influence is being reinforced by a favorable backdrop of rising stocks and a looming generational wealth transfer from baby boomers. According to Fundstrat’s Lee, household investors collectively control more wealth than institutional investors, with roughly 76% of household wealth held by people over the age of 60. However, about $120 trillion will be inherited by millennials and Gen Z over the next 20 years, which could lead to a significant increase in retail participation.

Brokerage firms are starting to build tools to cater to these younger investors, including 24/7 trading, access to cryptocurrencies and crypto ETFs, and private markets offerings. As Nick Wyatt, a 27-year-old auditor, said, “It’s the best decision I ever made” to start investing during the pandemic. Wyatt used a conservative, long-term strategy and has since gotten his fiancé into investing and used profits for a down payment on a home.

Smart Tip for Readers

When considering investing, it’s essential to educate yourself on the different types of investment products and strategies available, and to start with a solid understanding of your own financial goals and risk tolerance. By doing so, you can make informed decisions and avoid common pitfalls, setting yourself up for long-term success in the market.