Retail investors ceded the driver’s seat to institutional heavyweights

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This time last year, retail investors were busy throwing metaphorical Molotov cocktails into the daily markets — they piled on stocks of memes like AMC, Koss, and Bed, Bath, and Beyond. They drove Gamestop’s share price up 1,500% and bankrupted a London hedge fund while costing Wall Street’s Melvin Capital $6.8 billion.

So what are they doing at the start of 2022? New data indicates that, so far, retail investors are taking a relative chill pill.

Institutional overdrive

A market where institutional investors have more power, unlike the upside-down speculative days of stock meme mania, means a market driven by stable, old-fashioned earnings reports and guidance statements (and what that some extremely online marketers would call boring). And that is what is taking shape right now.

Retail traders are still investing heavily, hitting a high of $41 billion in stocks in January, according to Morgan Stanley, in fact. But this is the smallest share of market volume since March 2020. The main factor driving their share down in the market has been rising volatility – caused by inflation and the prospect of interest rate hikes to come. – meaning that old school, institutional investors have retreated from high growth stocks. This has generally slowed markets and lessened the impact retail traders can have:

  • After climbing to 24% in the first quarter of 2021, the share of trade made by DIY retail investors is now 18%, according to Bloomberg Intelligence.
  • Fund managers using macro strategies left $43 billion in stocks in January, enough to more than offset inflows from retail investors – withdrawals across the board also meant fewer hedge funds to sell.

“If volatility remains elevated, retail trade is lagging,” said Larry Tabb, head of market structure research at Bloomberg Intelligence. “And if I were to be a bettor, I would say volatility will likely remain elevated throughout this year.”

Reduced salary: Individual investors have lost 12% on trades this year, according to Morgan Stanley, suggesting market volatility has also been a drag on their pockets, in addition to their posting on Reddit.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Robert D. Coleman