As amateur investors have grown to roughly one-fifth of U.S. equity trading volume, there’s a “palpable fear that the Reddit generation is getting strong enough to disrupt the market patterns underpinning math-powered allocations.” This according to a recent article in Yahoo Finance.
The article reports that trading activity surged last year as a new contingent of investors “flush with stimulus cash” signed up for commission-free platforms like Robinhood. And although things have calmed down a bit since January’s GameStop frenzy, participation remains above pre-pandemic levels.
“As households start owning more and more equities, there are definitely different patterns in the marketplace,” according to quant firm Blueshift Asset Management’s chief investment officer Mani Mahjouri. He adds, “The retail investors coming in for whatever reason have a higher utility for risk than typical institutional investors.” This higher risk appetite, he argues, is fueling underperformance in a popular investing style called low volatility.
While stronger risk appetite has led to an uptick in quant fund performance this year, the article notes, “the worry is whether the Reddit cohort is fueling a lasting change in market patterns.” It cites academic studies showing the growing influence of retail investors: “One suggests herding by the users of trading apps leads to massive returns on the day that subsequently fizzle out. Another paper shows message-board chatter drives retail activity, fuels higher gains and deters shorting—all in the short term.”
Although quants typically try to “exploit behavioral quirks and stock volatility,” the article notes that efforts to unravel prices patterns by identifying retail flows is a heavy lift. The takeaway, the article concludes, is the fact that “quants are adjusting to meme-stock traders underscores the contingent’s newfound power.”