By Jason Chudoba and Jacques Cornet
Over the course of 2020, investors and the financial media alike were consumed with the performance of the “FAANG” stocks (Facebook, Amazon, Apple, Netflix and Google – with a side order of Tesla), the leading technology companies that resisted the pandemic turndown and continued to drive the market. By contrast, 2021 has started off with a “bang,” literally speaking, as Wall Street and Main Street were mesmerized by a group of companies, now referred to as the BAANG stocks (BlackBerry, AMC, American Airlines, Nokia, and GameStop), that became the target of retail-driven price spike that resulted in a massive short squeeze for a group of hedge funds.
Notwithstanding the recent focus, a recent research note by J.P. Morgan points out that the growing influence of retail investors has been brewing within the financial system for some time. Echoing this point, Larry Tabb, head of market-structure research at Bloomberg Intelligence, notes that trading by individuals now accounts for more stock market order flow than at any time during the past 10 years. This activity represents trillions of dollars, and has been fueled in large part by the growing popularity of commission-free trading. Bank of America recently reported that its client flows showed that retail investors represent 46% of trading volume in Special Purpose Acquisition Companies (SPACs) on its platform in January, up from about 30% two months ago, illustrating the influential role these investors play in the financial markets.
While the Robinhood platform of commission-free trading is rightly cited as a catalytic force here, its entry to the market compelled other major online brokerages including TD Ameritrade, E*TRADE and Schwab to follow suit, only further broadening the surge with no-fee stock trading. This shift away from commissions – together with increased access to margin and option trading – has materially expanded the universe of individuals wanting to try their hand at day trading. The COVID-19 pandemic has only fueled this trend as millions of novice investors began utilizing these platforms to try and capitalize on the stock market volatility.
Many of these new traders have turned to unregulated social media platforms like StockTwits and Reddit’s WallStreetBets to engage in conversation and share investing ideas. These forums offer a trove of valuable and evolving information about how sizable collections of individuals think about companies, sectors and Wall Street in general. Regardless of whether this information is rumor, speculation or fact, issuers can no longer afford to discount the voices of this growing community.
Analyzing and Engaging with Retail Investors
As the retail investment community becomes increasingly more sophisticated and aligned, their influence on stocks – for better or for worse – will undoubtedly become more pronounced potentially creating unexpected volatility in an issuer’s stock. Accordingly, issuers must work harder to understand the behaviors of this expanding contingent of stock pickers to determine how to best reach and influence them. As highlighted in this prescient article published by my ICR│Westwicke colleagues three years ago, issuers must take into account that amateur investors generally have a different understanding of their business and react to information differently than institutional investors.
Here are some tips companies must consider when it comes to analyzing and engaging with retail investors:
The recent surge in retail investor participation in the market has made clear that when organized and acting in concert, retail investors can exert outsized influence on stock prices, creating fortunes for some and devastating losses for others, while whipsawing issuers in the process. These investors are empowered by greater access to commission-free trading platforms, media content tailored to their interests, and tangible results that suggest they can make an impact. Accordingly, companies that have historically prioritized engaging with institutions need to reconsider their investor and public relations programs to account for the growing force that is retail investors.
Struggling with how to communicate with retail investors? Contact us.