I’VE PREPARED countless meals over the past few months—a result of COVID-19, which continues to have a big impact on daily life, especially here in Florida. Still, I’ve come to enjoy cooking and eating at home has saved me a ton of money.
But not all coronavirus habits have been good for our financial health. That brings me to the (supposed) rise of the Robinhood trader. By now, we’ve all seen the headlines and read the stories.
During the first half of 2020, one of the great narratives was the surge in trading among millennials and the generation that followed them, Gen Z. The storyline: These small traders were bidding up bankrupt company stocks, while also making COVID-19 plays like Zoom even hotter. These smalltime players have even been fingered for the recent stellar market performance of Tesla.
I love a good yarn as much as the next guy. But in this case, the evidence just isn’t there. A few weeks ago, Goldman Sachs produced a research note showing that, yes, individual investors are trading stocks and options more actively. But can we put some numbers on that?
It turns out we can.
Goldman’s researchers calculated small-sized buy and sell orders for stocks and options as a percent of total trading activity. Result? Small traders have lately accounted for about 2% of stock trading volume and 13% of options volume. These may not be perfect indicators of small investor activity, but they’re probably not too far off. What individual stocks have small investors been trading? The ones you’d probably expect: Tesla, Netflix, Chipotle, Beyond Meat and Zoom.
What’s driving the increase in retail trading volume? Three factors seem to be at play:
Still, we need to keep this trend in perspective. Households directly hold about a third of U.S. individual stocks. Yet small retail trades represent just 2% to 2.5% of total trading volume. Buys and sells by everyday investors are not only a fraction of total market volume, but also trading is small relative to what individuals own. Think of it this way: It’s like you have $100,000 invested in stocks and you let yourself trade with $7,500 of your portfolio.
If individuals aren’t driving the market, who is? Who’s the head chef? The Fed.
Just kidding. The big players are pension funds, foreign investors, mutual funds and other institutional investors. They account for far more of the stock market’s trading volume than individual investors. Who are the biggest players? That would be computer-driven high frequency traders.
The upshot: Millennials and Gen Z aren’t turning the stock market into a giant casino, pumping and dumping stocks left and right. It may seem that way, given all the articles about “story stocks” and day traders. But make no mistake: There are far bigger cooks in the kitchen.
Mike Zaccardi is a portfolio manager at an energy trading firm and a finance instructor at the University of North Florida. He also works as a consultant to financial advisors on an hourly basis, helping with portfolio analysis and financial planning. Mike is a Chartered Financial Analyst and Chartered Market Technician, and has passed the coursework for the Certified Financial Planner program. His previous articles include Please Ignore This, Reading the Signs and Inflection Point. Follow Mike on Twitter @MikeZaccardi, connect with him via LinkedIn and email him at MikeCZaccardi@gmail.com.
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OK, the percentages are being described “low”, but in reality, how much “irrationality” is needed to move the needle?
I would add that the percentages of trading in stocks favored by Robinhoods is no doubt larger in the stocks they favor. Is information available on, for example, the percentage of Tesla stock traded daily by small investors?