It’s often easy to laugh at retail traders as they post loss porn on Reddit, insist Strategy’s strategy is sound, buy Bonk ETFs, argue that Bed Bath & Beyond’s cancelled shares are worth something, and pump up fried chicken, quantum computing and small modular reactor stocks.
However, they are undeniably a rising power in markets, able to exert immense force on even the largest companies and turn smaller and midsized ones into financial playthings.
This is not a new point (nearly five years ago I argued that the GameStop shenanigans were a distraction from this new reality) but it is becoming increasingly apparent and more widely accepted. As Jefferies’ equity analysts said in a note today:
Retail investors have become an increasingly relevant component of the US trading ecosystem, representing >20% of volume — and even higher among names <$5. Growth in accounts, assets, and activity is reflected in the growth of HOOD, IBKR, SCHW, etc. A burgeoning product suite, expanded trading hours, and increased investor education support [ed note: loool] continued growth. Retail interest is here to stay; institutional investors should adjust their strategies accordingly.
In fact, the share of US stock market trading volumes accounted for by retail traders has now doubled since 2010 — and they are now more active than US mutual funds and traditional non-quant hedge funds combined.
More importantly, unlike the sudden 2020 jump caused by Covid-19 lockdowns and the early-2021 spike triggered by GameStop, the recent rise looks steadier and more sustainable. Jefferies’ chart showing this is unfortunately marred by one of the most demented, pointless double axes Alphaville has ever seen, but it’s still worth beholding (zoomable version).
Jefferies’ raw data is from Bloomberg Intelligence, and (Alphaville assumes) the well-stocked IT provider’s stock market structure guru Larry Tabb.
Here’s a more fulsome table that shows each market segment and how their trading shares have changed since 2010. As you can see, “high-frequency quant” — which we assume are mostly stat-arb hedge funds and multi-day prop shops — is pretty much the only other segment that has grown since then (zoomable version).
So what does this mean? Here are Jefferies’ three main takeaways:
Elevated volatility may persist: The daily return volatility of indices has generally increased compared to the pre-COVID period, especially for the Russell 2000. Since behavioral biases tend to be stronger among retail investors on both the upside and downside, we expect volatility to stay high.
Chasing short-term momentum might become common: 1-month price momentum, which was a mean-reverting or underperforming indicator until 2021, has begun to outperform in recent years. In fact, it has been one of the top factors for 2025. This indicates that investors are focusing on near-term winners and avoiding underperformers. If this trend persists, it could cause significant structural changes in US equities.
Growth premium likely to stay high, low-vol stocks may remain out of favor: Over the past few years, the market has favored growth stocks while shunning low-vol stocks, even on an equal-weighted basis. Given the market’s rise over the past three years, this is quite puzzling because, historically, value stocks tend to outperform during up-markets. To be sure, the rise of successful megacap tech stocks has contributed to this change in market correlation for the value factor. However, the fact that factor behavior is shifting so markedly, even on an equal-weighted basis, underscores the increasing influence of retail investors.
It’s tempting to assume that this is merely a bull market phenomenon, and that the importance of retail traders will recede again once many of them are eventually taken to the woodshed. And sure, yes, if there’s another bear market then the share of retail trading will subside again, as it did in 2022.
However, as you can see from the chart above, it only fell back to a new elevated level. And there are a lot of reasons to think that it’s going to head much higher over the coming decade, as improved access, technology and social media supercharges the phenomenon.
It might not be particularly good for society, but it’s hard to see how we will ever return to the noughties nadir of retail trading.
