Meme-stock 2.0: Wall Street’s retail trading boom is back

Retail investors are pouring record amounts into US stocks, potentially giving small traders even greater sway over markets than at the height of the “meme-stock” mania two years ago.

Then, an army of bored amateur traders trapped at home during the pandemic drove up the share prices of several small, struggling consumer companies such as video games retailer GameStop, cinema operator AMC Entertainment and home goods chain Bed Bath & Beyond.

Now, their bets are more widespread, suggesting fresh appetite following the losses many suffered last year. The flows of retail cash has helped to drive a powerful market rebound at the start of 2023 despite a relative lack of enthusiasm among professional fund managers.

Smaller investors on average have put an unprecedented $1.51bn to work each day over the past month, according to data collated by consultancy Vanda Research, while data tracked by JPMorgan showed that in January retail investors accounted for up to a quarter of all stock trading — a record.

“With recent surveys showing the institutional investor community remaining broadly bearish on stocks, it would be unwise to underestimate the importance of the retail cohort,” said analysts at Vanda. “The bottom line is that investors should heed signals from the ‘unsophisticated money’ crowd.”

Vanda’s data shows unprecedented interest from small traders in Tesla — a volatile stock long popular with individual investors — but also heavy buying of dividend-paying stalwarts such as AT&T and Coca-Cola. Crucially, those purchases were mostly of the shares rather than associated options, which can be used as a cheaper means of betting on a stock’s direction.

“The fact that it is not options tells us there’s been a shift in their long-term investing. I think that’s been the result of having lost money in the last year and a half,” said Vanda senior strategist Marco Iachini.

This year flows from the younger generation of traders associated with meme stock mania have been bolstered by interest from older investors, according to JPMorgan. The latter tend to favour funds rather than individual stocks and had by February 8 put $125bn into exchange traded funds and bond funds after selling $340bn last year.

The bank’s data shows that younger investors have been buying small stocks again, but also snapping up the biggest tech stocks. Tesla has gained 62 per cent this year, while the tech-heavy Nasdaq Composite is up 12 per cent. The small-cap Russell 2000 has also risen 10 per cent.

It is two years since senior US trading executives, regulators and analysts were summoned to Washington to explain why the meme stock-related surge in activity by small investors had rattled the wider US stock market.

That triggered calls for deep reforms. This week, the US Securities and Exchange Commission approved a timetable for halving trade settlement times to a single day to help reduce the risks that pushed some retail-brokers to limit buy orders at the height of the mania.

At the time, many analysts said Covid-19 had created the perfect conditions for a retail boom with low borrowing costs and a wave of new apps that made it easy to trade.

But last year’s rapid rise in borrowing costs does not appear to have damped the fervour. Vanada’s analysts pointed to the high levels of retail investment sitting in money market funds, which yet could yet be deployed if market conditions are sufficiently tempting.

Some of the recent activity is likely seasonal, with earnings updates providing a catalyst for buying, while the forthcoming US tax season may see some investors withdrawing cash to pay their bills.

“New account activity always picks up at the beginning of the year — I assume people say as a new year’s resolution ‘I’m going to pay more attention to my financial circumstances’,” said Thomas Peterffy, founder of Interactive Brokers, which focuses on more experienced investors. Its total number of client accounts has risen 23 per cent in a year.

“For me retail investors are a bunch of 60-somethings who have money and every now and again, want to wade into the market,” he added. “Twenty-somethings don’t have much money.”

Others disagree, arguing there is also a long-term shift under way as more investors become familiar with apps such as Robinhood that make it even easier to trade.

Some industry participants suggest the meme stock generation has mellowed and is using apps that first took off during the pandemic boom for more traditional investing purposes.

People assume most young investors are part of the meme stock crowd, said Zoe Barry, founder of Zingeroo, a retail-trading app with echoes of fantasy sports-style league tables. “They don’t realise there are a lot of young traders doing the research and trying to learn.”