An army of retail investors surged into U.S. equity markets in March as coronavirus lockdowns kept millions of Americans at home and sports betting ground to a halt. However, the impact of this legion of homebound day traders on the market has been negligible, and their moment may have already ended.
Online brokerages announced record numbers of new accounts in the past few months, including the trading app operated by Robinhood Financial LLC, which saw its user numbers climb by 30%, to 13 million, during the pandemic. In March, total daily average revenue trades by Charles Schwab Corp., TD Ameritrade Holding Corp. and E*Trade jumped to a record 6.33 million, a 229% increase from trading volumes in March 2019, according to data from Sundial Capital Research.
The new wave of investors was lured to equities for a number of reasons, including brokers dropping commissions to zero, social distancing rules keeping them home and volatile markets. But John Davi, founder of Astoria Portfolio Advisors, said — like several analysts interviewed — that without sports to wager on, much of the increase in retail trading during the pandemic may have been idle gamblers looking for new bets.
The retail investment account growth appears to have plateaued in June along with some of the more exuberant stock buying by these traders. As sports and sports gambling make their gradual return, many of these new retail investors will depart the equity market as quickly as they arrived, Davi said.
"Once sports betting opens, I believe they will also pivot as they likely understand sports more so than stocks," Davi said.
Little discernible impact
The swell in the investing public's population does not appear to have fed stock market gains since March, according to a June 12 note from Ryan Preclaw, head of investment sciences at Barclays.
Preclaw examined the security holdings of users of Robinhood, a popular trading app with no minimum deposit and no trading fees, and compared them to daily stock returns for S&P 500-listed companies. Rather than contributing to the historic equities rally since March, the data showed a negative correlation between changes in the number of Robinhood customers holding a particular stock and that stock's returns, Preclaw said.
"This analysis is not properly causal," Preclaw wrote, "but to us it is compelling evidence that the rally has not been driven by retail enthusiasm at brokers like Robinhood."
Robinhood traders have generated headlines over unusual daily moves in equities, particularly after users bought stocks of distressed companies, including Hertz Global Holdings Inc., Whiting Petroleum Corp. and Chesapeake Energy.
In a June 15 note, analysts with Société Générale wrote that no-fee access to the market and an increase in availability of "cheap" stocks from a number of companies distressed by the ongoing pandemic have contributed to the jump in retail investment. These new traders, such as those on Robinhood, can be particularly drawn to stocks with the worst balance sheet risk and the lowest share price.
"Yes, these 'trash rallies' are common during bear markets, but the ferocity of the moves this time around have been off the scale," the Société Générale analysts wrote. But the activity did little to move these stocks in a particular direction, the analysts found.
As of July 8, the most popular stock for Robinhood customers was Ford Motor Co., with about 926,250 Robinhood users holding that company’s stock, according to Robintrack, a website that tracks Robinhood user holdings.
As with other popular stocks for Robinhood users, these traders began pouring into the stock as its price plummeted. As Ford's stock price fell by 56% from Feb. 5 to March 24, the number of Robinhood customers holding Ford stock increased by 52%.
But the increase in interest from Robinhood traders continued even as the price rose. As the stock recovered by about 88% from March 24 to June 8, the number of users holding Ford stock increased by 67%. But continued buying from Robinhood customers is not enough to keep the stock rising, the data shows. From June 8 through June 26, the number of Robinhood customers holding Ford stock climbed another 4%, but the stock fell by 19.2%.
Davi with Astoria called Robinhood traders "lotto ticket investors" with little strategy outside of making large gains on very small investments.
"They want to put up a small amount to potentially 'strike it rich,'" Davi said. "I believe if they are making money, they will stick around. If they lose a decent amount of capital, they will exit."
'Stocks always go up'
With few sports to gamble on, Dave Portnoy, founder of the sports and popular culture website Barstool Sports, has become the most public cheerleader of the surge in retail investment. Portnoy, who now calls himself "Davey Day Trader," has ridiculed Warren Buffett as "washed up," picked stocks based on Scrabble tiles pulled from a bag and become a vocal critic of managed money.
"I'm not a financial advisor," Portnoy's Twitter bio states. "Don't trust anything I say about stocks."
In a June 12 note, Peter Cecchini, CEO of AlphaOmega Advisors, said Portnoy's brash style was "emblematic of just how emotional and extreme equity markets are now."
Jim Bianco, president and macro strategist at Bianco Research, said Portnoy epitomizes the general mentality of new retail investors who have swarmed equity markets.
"Stocks always go up. … That's their mentality," Bianco said in an interview. "That is the accepted investment strategy right now," he added. "Why do you think that March saw the biggest account openings in history? Because they looked at the collapse in March as a giant buying opportunity. It never occurred to them to panic."
'This is the new normal'
The equities buying enthusiasm among smaller retail traders may have peaked, according to Jason Goepfert, president and CEO of Sundial Capital Research. Since April, the number of small traders, defined as having 10 or fewer contracts, who have bought call options has increased from 39% of volume going toward buying call options to 52% for the week ended June 12, the highest level since 2000. It fell to 49% for the week ended June 19.
"This size of trader typically does not use sophisticated strategies, so it suggests they are using the options to speculate on a rising market," Goepfert said in an email.
Trading volumes on the S&P 500 climbed to a record 161.8 billion in March, up from 84.3 billion in February and 76.4 billion in March 2019, but overall volumes and revenue trades by some of the top retail brokerages have leveled off since March.
It is uncertain where these levels are headed. "I think for right now, at least in the short term, this is the new normal," Richard Repetto, managing director and senior research analyst at Piper Sandler, said in an interview. "Whether it's still in place in September … you just don't know what's going to happen."
Analysts said retail investors remain a relatively small portion of the overall equities market, but exact data is elusive.
The Trade Reporting Facility, which includes off-exchange volume from wholesale market makers and dark pools, had a market share of nearly 43%, or 5.8 billion shares, for the month through June 18, a record, according to research by Piper Sandler. Record market share from the Trade Reporting Facility indicates that the increased volumes of retail trading are driving a significant portion of the overall increase in trading volumes, Repetto said.