By Gediminas Rickevičius, VP of Global Partnerships at Oxylabs.io
Retail investors play an interesting role in the markets at large. For one, most academic researchers and hedge fund managers significantly downplay the importance of their everyday counterparts due to underperformance.
On the other hand, there has been a surge in the amount of retail investors since 2020. Investing has been made much more accessible and available to everyday folk. Combined with the global pandemic, these factors led to retail investors’ share of total equities trading volume now being close to 25%. Finally, there seems to be a push towards opening up private markets to more participants, as evidenced by EY research.
If such a trend continues, a massive influx of retail investors might increase the influence of their actions on the market. It might seem like a headache to seasoned veterans, but in many cases it might be a boon.
Retail investors provide cushion
As is often the case with many things in life, retail investors are seen through somewhat of a mythical lens. If one were to ask what event would define them, that answer would probably be the GameStop debacle.
It was certainly a visible and emotionally charged event that seemed to have everything you’d expect from a retail investor. Most people sought huge speculative gains through short-term trading without having access to tools that would enable such high frequency endeavors.
Additionally, some invested obscene amounts of capital, “leveraging” what they could. Often those were personal or spending loans. Some liquidated other investments to gain additional funds for the speculative play.
In the end, the event had all the hallmarks of everyone’s preconceived notions of retail investors. They were highly speculative, emotional, and chased significant gains. So, it would seem that would transfer over to other areas of investing.
Yet, some research would state otherwise, making retail investors highly useful to the market. As mentioned previously, they have begun to play a more significant role due to the increasing availability of investing.
A recent study has indicated that retail investors might be providing stability in times of market swings and crashes. COVID’s exogenous shock to the markets caused prices to tumble, but it was offset, by some margin, through the funds of retail investors.
Additionally, stabilization happens through providing additional liquidity to certain stocks. Finally, while they may seem contrarian as they pick stocks of which institutional investors think less, even if the contrarianism were true, it would still provide liquidity to stocks, which have less of it. In the end, retail investors play an important role in markets, especially during times of turmoil.
Retail investors talk (a lot)
Convincing someone to give up their investment strategy with all the data and potential software might be a little difficult. It’s a business that entirely revolves around knowledge intended to beat everyone else. Data and strategy sit at the core of investing.
As a result, outside of pure academical theory, any investment strategy is a closely guarded secret for institutional investors. Retail investors, on the other hand, are not quite the same. Many of them participate in various internet forums as a way of talking about strategy.
You can often find anything, ranging from simple investment advice (usually, ironically preceded by the saying “not financial advice”) to long posts discussing why some companies might be undervalued or overvalued.
Additionally, they are often posted in public forums where, while anonymous, posts are rated according to popularity. It would hold to reason then that such posts would have more sway over other retail investors. As a result, tracking large masses of small investments becomes an easier task.
Collecting such data, however, can be quite challenging. For one, there are places where retail investors congregate, but even then, there are a ton of posts going through them every day, making manual collection inefficient.
Couple that with the fact that sentiments expressed and overall influence can differ, and collecting such data for investment purposes nears to zero ROI or below. Fortunately, automated data collection methods have been developed.
Web scraping can be utilized whenever public data from the internet needs to be gathered at a large enough scale. There are plenty of solution providers online that can build complete out-of-the-box solutions that would make the collection of such semantic data easy.
An important caveat is that even with automated public data collection, everything gathered would be semantic. There would be sentences and paragraphs expressing some sort of sentiment, which might not be immediately obvious, and have an effect that is also shrouded in mystery.
One way to calculate influence is to look for raw ticker mention volume. Quiver Quantitative has done exactly that for a certain piece of Reddit. There’s value to be found, however, pure volume likely only weakly correlates with investments.
It is entirely possible that a majority of such mentions are hidden deep in posts and comments no one ever sees. Only the crawler bot captures them, because it goes through absolutely everything. As a result, it can produce signals that miss the mark.
As scraping can collect any aspect of the data stored within the page, extracting popularity indicators and adding them to the ticker calculations would produce more accurate estimations of how impactful the mention would be.
Finally, sentiment is an important piece of the puzzle. Luckily, we don’t have to build customized machine learning models to extract sentiment. Google’s Natural Language AI and many other tools have already been developed that can serve our purposes just fine.
Combining these three factors with the general talkativeness of the retail investor can give us fairly accurate insight into the inner movements of capital from them. Whether these can serve as a separate investment strategy or enhance current ones, it is something for those who track such data to decide.