How much are retail investors moving markets, versus individual stocks?
U.S. retail investors connected to Reddit’s WallStreetBets community are likely to be the cause of the initial surge in GameStop and other individual stocks that were subject to short squeezes. However, it’s possible that other groups—such as foreign investors and even institutions—tagged along and contributed to GameStop’s rally and volatility. I’m also not convinced that retail investors are responsible for the high returns of the S&P 500. While bored retail investors in quarantine may have helped prop up the market, aggressive government stimulus and Fed interventions also played an important role.
“I am much more worried about retail investors than institutional investors. GameStop and other hot ‘stonks’ will eventually crash, no matter how many memes are made about rocket ships to the moon.”
Do day trading platforms need any new limits or regulations?
It is worth considering ways to avoid a repeat of Robinhood’s selective trading halt, which prevented retail investors from buying stocks and call options at a time when institutional investors could trade freely. However, we should be very careful when implementing new regulations, which could have unintended consequences that leave retail investors worse off. One option is to force Robinhood and similar firms to hold more cash so that they can handle a high volume of retail transactions during turbulent periods. On the other hand, such a regulation may make it more costly for Robinhood to offer services that benefit retail investors.
Should institutional investors be worried?
I am much more worried about retail investors. GameStop and other hot “stonks” will eventually crash, no matter how many memes are made about rocket ships to the moon. GameStop’s recent market value has exceeded $20 billion, implying that retail investors left holding during the crash could lose many billions.
In contrast, institutions are better able to absorb risks and losses. In the future, institutional investors will probably avoid shorting a stock so much that the short interest exceeds 100% of available shares. They have learned that high short interest attracts the attention of communities such as Reddit’s WallStreetBets, and that these communities are capable of coordinating short squeezes.