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Wall Street Bets: The Real Impact of Retail Traders during Covid

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August is generally a low-volatility month in the markets. This is because many market makers are on vacation, and there are fewer market-moving events scheduled.

Typically, once the second-quarter earnings season is over (by the middle of the month), stock trading volatility reaches a minimum. The only other time of the year when there is less trading volume is the end of the year holiday period.

The flip side is that unexpected events can have a bigger impact as we saw on Monday.

Less liquidity typically means that the market moves further before rebalancing. While stocks have the most noticeable changes, forex and commodities can be affected also over the next couple of weeks.

That said, the US Labor Day is the unofficial start of the new “trading season” where liquidity and volume pick up.

But things are different now

At least, that’s how things would be pre-covid.

Now, the vacation season means there are more people at home with time to check their stock portfolios. Or they coordinate on social media to find a good investment.

One of the characteristics of the now-famous Wall Street Bets saga is that it was in part successful because they were taking advantage of a period of traditionally low volumes in the market. In fact, while covid significantly impacted other service industries, the financial services sector saw a massive increase in demand thanks to the pandemic.

Retail trading services in particular saw a significant increase in traders, as well as an influx of capital. This didn’t just happen in the US but across the world too.

How much are we talking about?

IG Group, for example, saw their active client numbers jump by 46% in the European area during the first half of this year. Moreover, Hargreaves Lansdown, which caters to larger traders in the UK, saw an influx of £8.7B and 233K new clients since the start of the pandemic.

Across the pond, however, the Chicago Mercantile Exchange saw trading volume increase by “just” 15% during the first quarter.

Part of the discrepancy could be because US trading firms were competing with the rise in popularity of trading apps, such as Robin Hood.

Unlike the scandal-associated Robin Hood though, SoFi saw their customer base jump by 113%, adding over a million users during the pandemic.

What this means for the markets

Economists estimate that retail trading has more than doubled since the pandemic began. Not only is there more money, but it’s also more concentrated.

On the other hand, emerging markets’ trading volume is actually down year-over-year. This is because outside of Europe and the US, retail traders’ favorite higher leverage trading instruments are not as readily available.

Additionally, economists expect up to 32% of the equity volume in the US to be retail traders. This figure is a stark increase from the 17.1% recorded in January of 2020.

The Wall Street Bets saga shows that retail traders definitely have the muscle to move the markets when coordinated. The latest estimate of retail trader assets at $15.5 trillion, is certainly a force to be reckoned with.

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