Retail investors replaced hedge funds as 'the 800-pound gorilla in the room,' former NYSE trader says

·Assistant Editor
·4-min read

Retail investors have upended conventional market dynamics in 2021, showing institutional investors and hedge funds that they are a force to contend with.

“The one dynamic that will change is, I think, big institutionally-driven hedge fund players will not get out over their skis the way that Archegos did,” Keith Bliss, a former NYSE trader and president of Capital2Market, told Yahoo Finance (video above). “But what the instructive part of that whole episode was that these bigger players, they're not the 800-pound gorilla in the room anymore. It is the retail investor.”

Retail investors made over 25% of all market trades in July and August of 2020, a trend that seemed to maintain momentum in 2021. At the same time, hedge funds are still big players: Global hedge funds were up 8.07% over the first 6 months of 2021, according to data from Eurekahedge, which was the strongest first half for hedge funds return since 2009.

The investing masses catalyzed a number of notable episodes this year, including initiating short squeezes in names like GameStop (GME), AMC (AMC), and Bed Bath and Beyond (BBBY), as well as the implosion of Archegos, which sent a wake-up call to institutional investors and led the Federal Reserve to comment on increased vulnerabilities brought about by meme stocks. 

Gamification of meme stocks

Bliss, who dubbed 2021 “the year, the era, of the retail investor," credited the continued evolution of financial technology, like zero-commission trading apps, and easier access to markets with breaking down barriers for everyday investors.

Chatrooms and forums like Reddit's r/WallStreetBets have been popular places for retail investors to swap investment theses online. These sites also haven't escaped the attention of institutional investors, who monitor them to see which stock the retail army will descend upon next.

“The institutions absolutely pay attention to it. It's a data point that they watch,” Bliss said. “If they don't, they would be foolish, because they'll just get run over by the momentum that happened.”

Therein lies the feedback loop aspect of the meme trade, which is that retail traders don't drive stocks up on their own — they spur momentum in an area of the market that instigates big momentum traders to join in with higher volumes.

WallStreetBets trader, Keith Gill, a.k.a. 'Roaring Kitty', appears to have purchased 50,000 more shares of GameStop on 2/21/21. (Photo by STRF/STAR MAX, AP)
WallStreetBets trader, Keith Gill, a.k.a. 'Roaring Kitty', appears to have purchased 50,000 more shares of GameStop on 2/21/21. (Photo by STRF/STAR MAX, AP)

“Even big quant shops are now able to read in those messages from Reddit and the other message boards and feed that in as one data point amongst thousands that they're doing there,” Bliss said. “So they've become a very important part of trading — not only for retail, but for institutions and for places like this.”

Bliss also cautioned that some of these platforms' recent innovations, along with social trading forums, have encouraged the gamification of trading. 

Gamified trading “is one thing that the institutions are having a hard time dealing with,” Bliss said. “Because when you hold sway in all of the markets and you carry what we call the ax around in the markets, and then suddenly somebody else is moving you around like a pawn on the chessboard — as opposed to you moving all the pawns — that's a big deal.”

He continued: “I dare say that the institutions are thinking right now how they can kind of win back that mandate. But it's going to be tough to do, given where we are in the markets.”

Retail investors risk flying too close to the sun

Another potential issue is an eventual market correction: Without discipline regarding risk management, unfettered optimism could leave some retail traders holding the bag, especially when it comes to trading options.

“The real risk that I see, though, is that if Wall Street as an industry, starts to get too aggressive with outsized leverage parameters,” Bliss said. “There are rules and regulations which limit the amount of leverage you can extend to someone. But how far are they willing to go?”

Bliss speculated that getting burned a few times will season amateur traders. Already, some traders seem to be pairing the YOLO mentality with more conventional practices like buying the dip.

“Probably, I dare say when a few of them lose on a number of bets, they become a little bit more rational in their trading,” Bliss said.

However, he also noted that “if they're able to pile onto a meme that's going on right there, and the meme becomes a self-fulfilling prophecy, they're not going to learn many lessons there other than to pile onto to the meme and make some money."

Grace is an assistant editor for Yahoo Finance and a UX writer for Yahoo products.

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