A bullish perspective: The impact of the new wave of amateur traders

Hoping your stock will turn into a Ponzi scheme isn’t trading, let alone investing, but there are plenty of amateur traders now willing to take a punt!

And the pandemic-spawned popularity of ‘retail trading’ as it is now known, has not gone unnoticed by the professional investing sector. US online trading platform Robinhood found itself this year at the centre of the GameStop rise and fall, when GameStop shares soared 1,700 percent as millions of speculative investors, encouraged by social media, employed a classic Wall Street tactic to put the squeeze — on Wall Street.

13-million-user-strong Robinhood is answering the zeitgeist. Its co-founder Baiju Bhatt says its mission is to “unlocking the microinvestor market.” In May 2021 it announced it was now even allowing its army of amateur investors buy shares of initial public offerings at the IPO price. This was a privilege previously only available to large institutions, investment banks and wealthy investors. The amateur trading furor has given birth to swarm of new social trading platforms like eToro, which allows users to copy other investors' trades, Freetrade, Trading 212, Acorns and ForexTime.

While the new breed of (mostly young) ‘civvy’ investors hitting the popular stocks of the likes of Apple, Tesla and AMC may not have the understanding of stable fundamentals, diversification and due diligence that professional investors do, they are becoming a force to be reckoned with. And despite Berkshire Hathaway executives Warren Buffett and Charlie Munger recently accusing zero-commission online brokerage firms like Robinhood of taking advantage of new investors’ “gambling instincts”, capital markets firms are sitting up and taking note. 2021 has proven to be quantum leap year for amateur trading.

Credit Suisse has said that since the start of 2020, retail trading activity (as a share of overall market activity in America) has almost doubled from between 15 per cent and 18 per cent to over 30 per cent. It even estimates that across some periods this year, they have accounted for a third of all US stock market trading. These Reddit-fuelled laymen traders are now a market driver whose trading sentiments professional investors want to understand. Their influence is now large enough to count. Because according to Bloomberg Intelligence, retail trading now accounts for as much volume as mutual funds and hedge funds combined.

Eric Liu, Head of Research at Vanda Research, has told the Financial Times: “Hedge funds, sovereign wealth funds, banks and other market professionals are poring over this kind of data.” The question everyone asking is where is this going? Is the global retail trading boom that has spawned scores of stock trading clubs, chat forums, Clubhouse conversations and REDDIT threads a COVID-19 fad or is here to stay?

A Deutsche Bank survey is bullish about the future. Retail investors expect to stay optimistic and hold even if the markets drops, it discovered. The story of the hedge fund industry has always been one of continued growth and innovation. Global hedge funds industry body AIMA may have spoken of being alarmed by retail investor frenzy 'distortions'. But its latest report Perspectives: Industry Leaders On The Future Of The Hedge Fund Industry states this: “As competition for capital flows intensifies, retail investors are likely to become an increasingly important source of growth for hedge fund firms.” Certainly for now, it seems, the new retail activity is here to stay.

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