Retail traders now account for more US market volumes than mutual and hedge funds, data shows


Retail traders are now responsible for almost as much equity trading volume in the US market as both mutual funds and hedge funds combined, according to data.

In an FT report on Tuesday citing information from Bloomberg Intelligence, retail trading as a share of overall US equity trading volumes climbed to over 20% in 2021, beating out hedge funds at just under 10% and mutual funds at around 6%.

READ: GameStop surges as it taps major shareholder to head transition committee

Retail trading has seen a strong growth trajectory since 2019 as the ongoing proliferation of trading apps as well as an upswell in the savings in some consumers during the coronavirus lockdowns led many to enter the stock market.

The growing power of retail traders to influence the market then burst into the mainstream in January after shares in video game retailer GameStop Corp (NYSE:GME) surged amid an effort to push up the price of the stock to inflict large losses on several institutional funds shorting the company’s shares. The spark for the meteoric rally was widely attributed to Reddit forum r/wallstreetbets and has since spread to other heavily shorted stocks including cinema chain AMC Entertainment Holdings Inc (NYSE:AMC) and Blackberry Ltd (NYSE:BB).

While GameStop’s shares have pulled back sharply from their late Janaury peak at the height of the trading frenzy, the stock is still trading at US$194.50 as of Monday’s close compared to around US$17 at the start of the year, suggesting at least a large chunk of the new investors are in for the longer run.

Similar trading frenzies can be seen in new asset classes such as cryptocurrency Bitcoin, which has seen its valued balloon 587% over the last 12 months as investors sought out new havens for their cash during last year’s market volatility.

Current environment heightens risk of emotional investing, warns analyst

While some retail traders may be enjoying their newfound prominence on the global stock markets, some analysts have warned that the current environment means the risk of emotional investing, when people make investment decisions based on impulse and thus piling into investments when markets, stocks or asset classes are high and selling when they are low, has hit a new peak.

Behavioural finance experts Oxford Risk said that on average emotional investing costs investors around 3% every year in lost returns over the long-term, however in the current climate they predicted this will be higher.

“We currently have the perfect ‘storm’ for emotional investing. Following the coronavirus crash in the first quarter of last year when stock markets saw big falls, we are now in a bull market, with markets around the world rising. Optimism is higher because of hopes around the coronavirus vaccine roll-out and economic and fiscal stimulus programmes. However, there are huge economic problems ahead around unemployment and huge public spending deficits for example, so we should expect the unexpected in the markets over the coming months”, Greg B Davies, head of behavioural finance at Oxford Risk said in a statement.

“The rise in the value of Bitcoin has also led to a crypto-assets ‘gold rush’, with retail investors piling into an incredibly volatile asset class that most don’t understand. The pandemic means many investors are currently highly emotionally sensitive and have a shortened emotional time horizon which increases the appeal of get-rich-quick gambles”, he added.


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