Global equities saw the largest weekly inflow of money ever, of $5.8 billion, Bank of America said, citing EPFR Global data. Make no mistake, not all of that money is from day traders, but it’s an indication of the mass hysteria.
Michael Every, global strategist at Dutch bank Rabobank, added a compelling question. “You only see how stable a system really is by logically pushing it to its limits, which we are doing on multiple fronts,” he says. “How will it work if 50% of people decide to day-trade central bank liquidity for a free ride to prosperity,” he asks. “Obviously someone needs to cook and deliver pizzas to those day traders.”
For now, that question will remain unanswered (and, in any case, it’s chicken tenders, not pizza, for the WallStreetBets crowd). But a new research paper quantifies just how big the impact of the retail investment surge has been on the U.S. market. Using account holdings data from Robinhood Markets, and the 13-F filings from big portfolio managers, researchers were able to estimate retail and institutional demand.
The impact was yuge. Robinhood traders made up for over 7% of the variation in stock returns during the second quarter of 2020, the researchers found. Without the Robinhood crowd, the aggregate market cap of the smallest quintile of U.S. stocks would have been over 30% lower. Disney is Netflix, Finkle is Einhorn
Even some prominent companies have been squeezed by Robinhooders, well before GameStop mania set in. Ford Motor [$F] return would have been 7.5% lower in the Q1 of 2020 without Robinhood traders, and General Electric [$GE] would have dipped another 2.75 points. In Q2, Ford’s bounce back would have been over 20% lower, and Delta Air Lines [$DAL] and United Airlines [$UAL] would have been over 15% worse each, the researchers said.
“The surprisingly large aggregate impact of the small retail sector is owed to the fact, that a large fraction of the equity market is managed by institutional investors with price-inelastic demand curves,” said the researchers, Philippe van der Beck of École Polytechnique Fédérale de Lausanne and Swiss Finance Institute, and Coralie Jaunin of the University of Lausanne and Swiss Finance Institute. GFY Chewy, Poshmark Is Going Pet-Friendly
Alas, these popular index funds are seeking to replicate indexes at any cost. For all the attention on short sellers, the Robinhood crowd is able to affect the price of big companies that are held mostly by passive institutional investors, the researchers said.
Gaming retailer GameStop [$GME] and cinema chain AMC [$AMC] saw extraordinary rallies, as retail traders organizing on Reddit’s WallStreetBets forum squeezed out hedge funds. But what about headphones maker Koss [$KOSS], with negligible short interest, which jumped from $4 to $110? They applied their methodology to GameStop specifically. Buying 10% of GameStop’s shares outstanding could have caused a 57% jump in its stock price, based on the institutional ownership from July, the researchers said.