WHAT COMES NEXT FOR "MEME" STOCKS - BNY Mellon
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ACCESS A BROADER MARKET PERSPECTIVE WHAT COMES NEXT FOR “MEME” STOCKS BY PETER MADIGAN
BY THE
NUMBERS
300%
Increase in average daily orders through one retail
equities brokerage in Q1, 2021 vs. Q1, 2019
24.4 BILLION
Total number of shares traded across U.S. equities
exchanges on January 27, 20211
600,000
New downloads on the Robinhood Markets trading
app on January 29, 20212
3 MILLION
Number of new account openings on Robinhood in
the first four months of 20203
13 MILLION
Number of users on the Robinhood Markets trading
platform by February 20214
SOURCES:
1. CBOE Global Markets
2. JMP Securities
3. CNBC Squawk Box, October 27, 2020
4. Congressional Testimony before U.S.
House of Representatives Subcommittee on
Financial Services, February 18, 2021RETAIL INVESTORS HAVE BEEN MOVING
MARKETS, THANKS TO PANDEMIC-RELATED
DAY TRADING AND COMMISSION-FREE
EXECUTION. DESPITE A RECENT PULLBACK,
EXPERTS SAY THERE IS NO END IN SIGHT.
BY PETER MADIGAN
hen millions of anywhere on a mobile phone; and a Instead, cult-like trading among an
W individual stock
pickers took on
Wa l l S t re e t —
leading transaction volumes to surge
in January—some didn’t see it coming.
pandemic that has caused a spike in
day-trading. Some have seen huge
windfalls; others crushing losses.
Several investors in both camps have
been reluctant to cash out.
expanded set of retail investors is a
sign that equity markets are changing
rapidly, and that perhaps the shift will
be permanent. At the same time, bro-
kers, exchanges and regulators are
Now that the new generation of traders Moreover, the retail participation is trying to determine what to make of
is driving so much of today’s equity much broader than initially reported, the phenomenon and how to tamp
flows, established industry players are according to market participants. The down on any concerning, specula-
asking what their participation means activity has already targeted dozens tive activity that might exacerbate the
over the long haul. of stocks across multiple sectors. price swings.
The galvanization of these “retail” It involves large numbers of retail
investors has captured the market zeit- investors who have opened zero-com- MULTI-PLAYER MODE
geist in recent months, as huge vol- mission brokerage accounts. And the Much of the heightened activity has
umes of trades were effectively crowd- activity has been underway far longer been attributed to so-called “meme”
sourced from social media chat rooms. than many might suspect. stock trading, when retail investors
Their activity has prompted eye-pop- First-quarter trading volumes would surge into popular low-priced equities,
ping moves across dozens of low-priced have been the most compelling story in many cases after seeing fundamental
stocks that were either thinly traded or for stocks in a generation, had it not analysis posted online.
virtually moribund. been for last spring, when U.S. equities The poster child for this trend is,
Fueling the behavior are discount plunged from all-time highs into bear of course, U.S. video game retailer
brokerages now offering commis- market territory in just 15 trading ses- GameStop (GME), which began to be
sion-free trading; technology that sions due to the panic surrounding the promoted as an undervalued security
is making it easier to transact from COVID-19 pandemic. in mid-2020 on Reddit’s WallStreetBets“Around August 2020, principal dealers began to receive a lot of order flow from retail investors looking to buy stocks trading below $5, whereas that kind of activity was in the low single digits pre-COVID.” ADAM INZIRILLO, CBOE GLOBAL MARKETS discussion board. GameStop’s price Charles Schwab survey. onset of COVID-19 creating a larger climbed steadily through late 2020 Individual trade flow at the start population of day traders, who could before exploding to $347 a share on of the year neared record levels. On buy and sell from their mobile phones, January 27, an 8,575% increase on the January 27, there were 24 billion shares trade algorithmically, or even use stock’s $4 valuation six months ear- traded, versus around 10 billion shares large amounts of borrowed money. lier. By late March, it traded around traded daily as of mid-April. Analysis Retail flow has played a large part in $181 and remains volatile at the from Bloomberg Intelligence estimates driving the price action in U.S. equi- time of writing. 23% of all U.S. equities off-exchange ties ever since, although participation The noteworthy aspect of this is not trading volume in the first quarter of has been outsized since the middle GameStop, or AMC Entertainment, this year came from retail investors, up of 2020. Lately, it has spread even to No ki a , Bl a ckB e r r y or any ot h e r from 20% in 2020 (see figure 1). cryptocurrencies, as evidenced by the hyped-up name, however. It is what The proportion of retail flow on equi- interest surrounding Coinbase Global, the phenomenon tells investing pro- ties exchanges is thought to be higher a cryptocurrency exchange, which fessionals and regulators about the still. Last July, Joseph Mecane, Head conducted a direct listing in April. changing makeup of equit y mar- of Execution Services at broker dealer “The psychology and sociology of kets, namely that retail investors can Citadel Securities, told Bloomberg this relates to the pandemic and mom, move markets. that retail investors accounted for as pop and millennials having access to These investors are a mix of first much as 25% of U.S. equity trading institutional technology,” Ron Hooey, timers with new accounts, and indi- on busy days, up from 10% in 2019. Head of Institutional Equities Sales at vidual “mom and pop” investors A spokesman for Citadel, which han- BNY Mellon. “It was the perfect storm who have been trading more actively dles approximately 40% of U.S.-listed for all of this retail frenzy to occur, and during the pandemic while working retail volume, declined to provide an it’s going to impact transparency.” from home, in many cases armed updated figure, stating that recent Much of the commentary on meme with stimulus checks. Some 15% of trading “was too volatile [and] likely stocks has portrayed the group of retail retail investors trading today started an aberration.” investors as a relatively small group of only last year, according to a recent The trend started last year, with the activist millennials, using social media
RETAIL SHOPPING
Individual investors’ estimated share of U.S. equities trading volume is on the rise
20%
Percentage participation of U.S. equity trade volume (%)
15%
10%
5%
0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Note: 2020 data are for January through June. SOURCE: BLOOMBERG INTELLIGENCE
FIGURE 1
to successfully squeeze hedge funds volumes for traditional retail passive LOW BARRIERS TO ENTRY
out of their short positions. But data investing vehicles such as exchange- A number of obscure names that have
from Cboe show that retail trading is traded funds (ETFs) and mutual funds. drawn the attention of retail investors
much broader. In the fourth quarter of 2019, ETFs in the sub-$5 range have seen their val-
Participation is not concentrated accounted for about 12% of total U.S. uations explode this year as a result
solely in the 15 or so headline-grabbing equities volumes, but by the fourth of retail interest. Relatedly, they have
names that initially dominated the quarter of 2020, they had fallen to sparked interest in stocks priced below
coverage. It has evolved to cover at about 6%, according to Cboe. $1 – the so-called “penny” stocks.
least 50 names, based on the number As the second quarter gets “Around August 2020, principal
of companies in which online bro- underway, retail investors appear to dealers began to receive a lot of order
kerage Robinhood Markets restricted be taking a breather (see figure 2), flow from retail investors looking to
trading on January 29 at the height of perhaps because there are now more buy stocks trading below $5, whereas
the meme stock mania. distractions with restaurants opening that kind of activity was in the low
Many hedge funds were shor t back up and COVID-19 vaccines being single digits pre-COVID,” says Adam
GameStop — Melvin Capital rolled out. Average daily volumes Inzirillo, Head of North American
Management, most transparently — but of shares transacted as of mid-April Equities at Cboe.
once the potential to execute a short have fallen 38% from their 15.6 billion The breadth and extent of the
squeeze in the position became widely January average, according to Cboe. interest goes beyond U.S. equities, too,
known, institutional money flooded Despite this pullback, experts say the taking in stocks such as U.K.-based
into GME too. new set of traders are more educated Critical Metals and Canada-based
The surge in meme stock investing on investing and will remain a force Sundial Growers. Cboe observes that
has not been reflected in trading in markets. overseas retail flows have entered the“If you added a charge of 0.1% on to the cost of a transaction, that would be enough to discourage the zero-commission day-trading retail speculators.” TERESA GHILARDUCCI, NEW SCHOOL U.S. market though international retail had been removed. number of shares transacted and the brokerages such as Interactive Brokers Marry that with the electronifica- trade volume surged. But even as valu- and Webull Financial tion of markets, proliferating chatter ations began to sharply recover, activity Analysts attest that the recent prolif- on social media sites and a global was consistently north of 10 billion eration of zero-commission trading was pandemic, and the result was crowd- shares traded daily. the primary catalyst for the eruption in sourced trading ideas that could build A significant part of this heightened retail stock picking (see figure 3), along quickly in different corners of the activity was coming from retail inves- with a fear by day-traders of missing out internet simultaneously. tors and still is. “Our average daily on a quick win. While Robinhood intro- Robinhood added 3 million new orders were up 302% compared to duced commission-free trading in 2015, users in the first four months of 2020 2019, and the majority of that increase Charles Schwab became the first of the alone, according to Co-Founder and was coming from retail accounts,” says large established retail brokerages to Chief Executive Vladimir Tenev. By one director on a retail equities bro- eliminate its commission fee in October February 2021, the platform boasted 13 kerage desk in New York. 2019. Within weeks, TD Ameritrade, million users with as many as 600,000 Options were another reflection of E*Trade and Fidelity Investments had new downloads of the Robinhood their participation. Single-contract done the same, and a few months later, app on January 29, the height of the options trades in December consti- Vanguard followed suit. GameStop trading frenzy. tuted 8% of all options in the U.S., with Previously, brokerages had typi- The impact that these millions of much of those trades driven by retail, cally offered only commission-free new retail participants were having in according to Cboe. trading in their own families of passive the U.S. equity market soon became investing products such as ETFs and apparent. In the first two pre-pandemic ALL POWERED UP mutual funds. But as 2020 dawned, months of 2020, the total number of As 2021 began and the meme stock retail investors stood on the preci- shares transacted across U.S. equities trading mania kicked into high gear, the pice of a new decade in which, for exchanges held steady at between 7.8 number of shares traded hovered close the first time, even the most cursory billion and 8.3 billion, according to to the 15 billion mark on U.S. equities hurdle to speculating in single stocks Cboe. Then, in March 2020, both the exchanges, while the total trade count
OFF PEAK
Equity trade volumes in April have fallen from their January peak
20
1Q21 ADV OF 14.7BN SHARES
18
16 15.6 15.3
Average Daily Volume (Billions)
14 13.4
12
10.9
10 9.7
8
7.0
6
4
2
0
2019 2020 JAN- 21 FEB - 21 MAR - 21 APRIL - 21TD*
*April data are through 4/14/21 SOURCE: CBOE GLOBAL MARKETS AND PIPER SANDLER & CO.
FIGURE 2
bounced around 80 million. This was with 24.5 billion shares traded during held hearings at which policymakers
up from 8.4 billion and 43 million that session across 126 million trades, raised concerns about the “gamifica-
respectively, a year earlier. The lion’s according to Cboe (see figure 4). tion” of investing and the potential
share of these were driven by retail As extraordinary as those num- risks to novice retail investors.
investors. bers are, the continuation of elevated Many questions were focused on
Not only was the flow notable trading activity through February and the “payment for order flow” busi-
because of its origins, but the compo- into March was even more meaningful. ness model used by retail brokerages,
sition of the order flow was markedly Ten of the busiest days for electronic arrangements in which brokerages
different from the names that had tra- order flow into the retail equities desk receive compensation for directing
ditionally been the most active, such occurred in January and February of client order flow to a particular market
as Tesla or Facebook, Amazon, Apple, this year, for example. maker. The theory is that there could
Netflix and Google (FAANG stocks). “Despite all the focus on the market be a conflict of interest there: If the
“The orders for the FAANG-type action at the end of January, the story broker is being paid for order flow, it
names that have typified retail order that the market data is telling us is might be more concerned with nur-
flow in recent years were supplanted clear: this retail investing surge is far turing those relationships than main-
for days, running. On many days, GME from over,” says Cboe’s Inzirillo. taining high execution quality for retail
was the number-one name that we The meme stock phenomenon has customers.
were executing,” recalls the retail equi- already attracted the attention of leg-is- At a hearing of the Senate Banking
ties director. lators and regulatory authorities, who Committee on March 9, senators
January 27 — the day of GME’s all- have expressed some interest in questioned whether commission-free
time high — was by far the busiest day structural reform. In February, the trading is actively encouraging amateur
for activity on U.S. equity markets, House Financial Services Committee investors to speculate on meme stocks,Notes: E*Trade definition of DARTs adjusted in November 2019 to reflect all customer-directed
trades. Schwab monthly value estimated from weekly client trading activity report (13 weeks).
Schwab value includes revenue, asset-based, and other trades (See The Charles Schwab Corporation
Recent Client Trading Activity Report for more detail). Interactive Broker values based on
Monthly Brokerage Metrics report. TD Ameritrade values based on latest Monthly Metrics report.
Data from January 2019 through December 2020. As of October, 2020, Morgan Stanley
acquired E*Trade and Charles Schwab acquired TD Ameritrade. TD Ameritrade DARTs not reported for
August 2020.
NEW ORDER
Daily average trades by major retail brokerages*
6,000K Charles Schwab
Charles Schwab + TD (Pre-Acquisition)
Charles Schwab + TD (Post-Acquisition)
5,000K
E *Trade
Interactive Brokers ROBINHOOD ANNOUNCES
Daily Average Trades
4.3M DARTS IN JUNE
4,000K Robinhood
TD Ameritrade
3,000K BROKERAGES GO TO
ZERO-COMMISSION
2,000K
1,000K
0K
04/01/19 08/01/19 12/01/19 4/01/2020 08/01/2020 12/01/2020
SOURCE: COMPANY FILINGS/REPORTS, NASDAQ ECONOMIC RESEARCH
Notes: E*Trade definition of DARTs adjusted in November 2019 to reflect all customer-directed trades. Schwab monthly value estimated from weekly client trading activity report (13
weeks). Schwab value includes revenue, asset-based, and other trades. (See The Charles Schwab Corporation Recent Client Trading Activity Report for more details.) Interactive Broker
values based on Monthly Brokerage Metrics report. TD Ameritrade values based on latest Monthly Metrics report. Data from January 2019 through December 2020. As of October 2020,
Morgan Stanley acquired E*Trade and Charles Schwab acquired TD Ameritrade. TD Ameritrade DARTs not reported for August 2020.
FIGURE 3
and whether regulation is required to Affiliated Scholar with the Mercatus odds with their customers if their rev-
protect them from themselves. Center at George Mason University, enue comes from wholesalers, not
Testimony from witnesses was con- argues that zero-commission trading is retail. At issue will be the question of
flicting, with some advocating for the result of a multi-year competition whether or not it can be demonstrated
restrictions to be imposed in this area, between brokerages to drive down that investors receive best execution —
and one senator questioning whether execution costs for the customer. He as demanded by U.S. law — and price
the design features of retail trading suggests that if the payment for order improvement under the payment for
apps should be regulated to combat the flow model was prohibited, broker- order flow model.
gamification appeal to young investors. ages would compete to eliminate fees Another likely area for scrutiny is the
“If you added a charge of 0.1% onto in other areas. amount of time it takes to settle trades.
the cost of a transaction, that would “Misleading market information, Currently, U.S. stocks settle on the
be enough to discourage the zero- misconduct — yes, regulate against second day after the trade is agreed,
commission day-trading retail specula- those behaviors. But you cannot regu- a convention known as T+2. If instead
tors, without negatively impacting long- late away the risk of losing money in the market moves to a single day, or
term institutional investors like pen- financial markets,” says Vollmer. T+1, it might reduce the trade settle-
sion funds,” says Teresa Ghilarducci, ment risk in the middle office to one
Professor of Economics and Policy ADMINISTRATIVE day of exposure from two, and help
Analysis at the New School in New PRIVILEGES discourage some of the more worrying
York, who testified before the Senate For now, payment for order flow has speculation.
Banking Committee. attracted the most serious political Even if Congress does not enact
Other witnesses disagree with that and regulatory scrutiny, because it changes, it seems likely that incoming
assessment. Andrew Vollmer, Senior potentially puts retail brokerages at Securities and Exchange CommissionSCORING POINTS
Retail investors are contributing to a higher number of individual trades on U.S. equity exchanges
140
120
100
Number of Trades (Millions)
80
60
40
20
0
0 0 0
20 20 20 20 20 20 20 20 20 02 02 02 21 21 21
/ 20 / 20 / 20 / 20 / 20 / 20 / 20 / 20 / 20 1 /2 1 /2 1 /2 20 20 20
/1 /1 /1 /1 /1 /1 /1 /1 /1 0/ 1/ 2/ 1/ 1/ 1/
1 2 3 4 5 6 7 8 9 1 1 1 1/ 2/ 3/
SOURCE: CBOE GLOBAL MARKETS
FIGURE 4
Chairman Gary Gensler will address trade body issued a survey of its trading during the dot.com bubble, I used to
the issue. The SEC and the Financial committee members and exchange ask my undergrad students how many
Industry Regulatory Authority have contacts in mid-April, asking them for were trading stocks [online], and they
longstanding mandates to protect retail their thoughts on the “new normal” for would tell me how much they were
investors. volatility and volumes, as well as “risks making and how easy it all was,” says
A s ke d a b o u t t h e m e m e s t o c k to markets.” SIFMA said in the note that Michael Piwowar, executive director
phenomenon during his Senate con- such responses would be of interest of the Milken Institute Center for
firmation hearing in March, Gensler given the “difficulty in quantifying the Financial Markets and former a SEC
offered only rhetorical responses. levels of retail participation.” Commissioner.
“How do we protect investors using Although retail volumes have fallen “That was in the days of having to
trading applications with behav- from their recent peak, what’s clear pay $10 or $20 to make a trade. If it
ioral prompts designed to incentivize is that many of those investors are was easy then, how easy is it now when
customers to trade more?” he asked. moving in tandem - and with some there are no commissions?” he asks.
How does the meme stock episode analysis guiding them, they can build
end? With new $1,400 stimulus checks momentum in the stocks they target.
being deposited into the accounts of Whether their participation moving
hundreds of millions of Americans, forward is frenzied or more muted, Peter Madigan is editor-at-large for
many analysts expect the trading craze their rise has brought a lot of new BNY Mellon Markets.
to continue. traders to the marketplace who are Questions or comments?
The Securities Industry and now engaged in their finances in ways Contact ron.hooey@bnymellon.com
Financial Markets Association (SIFMA) they never were before. or reach out to your usual BNY Mellon
is on its own fact-finding mission. The “When I was a finance professor relationship manager.LIAM THE
GEN-Z INVESTOR
Liam Magrini, a 21-year-old music Between Jan. 25 and Jan. 27, the
production student who lives with his peak price of GME, his then-$922.26
mother in Brooklyn, saw the chatter investment had risen to $5,553.19 (see “GME was
about shares in GameStop (GME)
“going to the moon” on the Reddit
figure 5). He decided not to borrow
money from Robinhood on margin,
about to
WallStreetBets discussion board in although it was offered to him, and blow…and
early January and — against the advice
of friends — invested $100, when the
cashed out on March 10, when the
stock was at $265 and the position
‘Diamond
stock was priced at $54. was worth $4,374.54. Hands’ was all
Fellow Gen-Z investors were
encouraging people to hold on to
He says it gave him a taste for more
sophisticated investing. In February,
you heard.”
their positions, no matter how wild he started investing in a 2x leveraged
the ride. “GME was about to blow and oil and gas ETF offered by Direxion LIAM MAGRINI,
Robinhood was on the front page of (GUSH), which delivers twice the RETAIL INVESTOR
the App Store,” he recalls. “Diamond daily gains or losses of the S&P Oil
Hands was all you heard, all the and Gas Exploration & Production
time,” he adds, referring to a “meme” Select Industry Index. “It just so hap-
culture phrase to applaud personal pens I came in at the right time,” says
fortitude in holding a stock amidst Magrini. “I don’t know too much, so I
volatile trading. don’t want to push my limits.”
A QUICK WIN
Liam Magrini, a retail investor, got into GME just before the stock price surged to its peak
400
JAN 27, 2021
JAN 25, 2021 MARCH 10, 2021
$5,553.19
$922.26 $4,374.54
Share price of GameStop (GME)
(CASH OUT)
300
JAN 15, 2021
200 $100
(CASH IN)
100
0
LIVE 1D 1W 1M 3M 1Y ALL
SOURCE: LIAM MAGRINI
FIGURE 5
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