Day Traders as ‘Dumb Money’? The Pros Are Now Paying Attention

Discussion in 'Wall St. News' started by ajacobson, Jan 16, 2022.

  1. ajacobson

    ajacobson

    Last year, an army of day traders turned markets upside down. This year, professional fund managers are finding that they had better keep tabs.


    Paywall

    https://www.wsj.com/articles/fund-m...tail-day-traders-11642132135?mod=hp_lead_pos7


    Last year, an army of day traders turned the markets upside down. This year professional fund managers are looking to keep a better eye.
    JPMorgan Chase & Co. introduced a new data product in September that includes information on which individual investors are potentially buying and selling securities, as well as which sectors and shares are talked about on social media. is going The bank says that about 50 customers, including some of the largest asset and volume managers, are testing the product. Equity traders at JP Morgan are also using it to help them manage their risk.

    “If you’re a professional investor the inflow from retail isn’t something you can ignore,” says Chris Barthe, global co-head of cash equity trading at JPMorgan. “It’s a whole new investor class that has emerged, and it’s an investor class that’s really getting the topics right.”


    crooks run away
    This change shows how much the crooks have changed the investment landscape. A year ago, market observers were questioning whether the retail revolution would continue. Now many are asking what it will look like this year.

    Millions of Americans, who were sitting at home due to COVID-19, became day traders in 2020, after shunning active investing over the past decade. Fascinated by volatile markets and phone apps that freed it up to trade stocks, they flocked. On social media to invest ideas. That year, he piled on stocks such as Hertz Global Holdings. Inc.

    (And eventually rewarded when the car-rental company exited bankruptcy). According to Devin Ryan, director of financial-technology research at JMP Securities, it is estimated that more than 10 million individual investors opened new brokerage accounts in 2020.

    Last year 2020 trends accelerated. JMP Securities estimates that another 15 million Americans will sign up for brokerage accounts in 2021. Social-media forums became increasingly used for trading. Some individual investors used their growing numbers to send stocks, including GameStop. Corporation

    and AMC Entertainment Holdings Inc.

    flight. Many newbies put huge losses on some hedge funds to demonstrate that the traditional playbook isn’t the only way to win.

    Investments that made little sense on paper became valuable in 2021 as day traders declared them so. Joke cryptocurrencies such as Dogecoin—more than 1,900% based on last Friday’s levels—became self-proclaimed millionaires in the past year. A market for non-fungible tokens (NFTs), or digital images of objects such as bored-app avatars, exploded.

    JPMorgan estimates that individual investors accounted for more than a third of daily trading activity at times over the past 18 months, reaching nearly 40% of shares traded on peak days.

    To be sure, many newcomers lost money. Some took out loans without realizing what they were doing, leaving them vulnerable to huge losses when stock prices fell. Risky investment strategies exploded, including options trading. Many amateur investors buy into the buzzed stocks near the top of the rallies, only to see the price drop sharply.

    Individual traders purchased a net $292 billion of US stock and exchange-traded funds in 2021, according to Wanda Research’s Wandatrack platform, which tracks and sells data on purchases of US equities by individual investors. This is more than seven times the amount in 2019. Individual investors are now poised to continue with the same level of buying activity in 2022.

    Analysts expect the road ahead for US stocks to be better this year, and some money managers believe any prolonged volatility could drive individual investors out of the market. Many say the activity today resembles that of the late 1990s, when individual investors traded only to flee when the dot-com bubble burst.

    So far, individual investors have shown a strong stomach for a rough day. Last year, the group’s eight biggest buys by dollar volume occurred when the S&P 500 sank 1.3% or more, Wandtrack data shows. Several academic papers have found that individual investors sometimes help stabilize markets while providing liquidity in times of volatility.

    big name notice
    By some accounts, novice investors have already replaced the trading strategies of some professional investors. One method in particular: the way some bearish bets do.

    There was a high level of short interest in meme stocks like Gamestop before it caught the attention of Reddit traders. This means that other investors—usually professionals, such as hedge funds—were speculating that those stocks would decline. When shorting a stock, an investor borrows shares of a company and sells them, hoping to buy them back at a lower price later.

    When amateurs increasingly shipped Gamestop and other shares, short sellers were sometimes forced to buy back the shares, often at very high prices.

    According to an analysis by Ihor Dusanivsky, these days, investors are avoiding taking big chances with their short-selling plays. He is Head of Predictive Analytics at S3 Partners, a technology and data analytics firm that closely tracks the activity of small vendors.

    Just seven stocks in the US market had short interest of 40% or more at the end of 2021, according to an analysis of their stocks, where at least $10 million of shares were sold short. This was down from 40 shares in early January 2020 and 19 shares in January 2021. And unlike the previous period, none of the stocks in their analysis had a low interest rate of 70% or more at the end of 2021.

    Last year, S3 began offering new tools that tell clients which stocks have low interest levels and which may be vulnerable to sudden losses when individual investors pile on.

    “The back of every hedge fund’s mind is, ‘I don’t want to be on the wrong side of the meme-stock play,'” says Mr. Dusaniski. “It’s a full-time job to make sure you don’t get hit by a bus.”

    Ms. McCabe is a reporter for the Wall Street Journal in New York. He can be contacted at caitlin.mccabe@Businesshala.com.

     
  2. easymon1

    easymon1

    LOL, When they rely on hope, their odds of success can be less than spectac. Even collusion can have its ups and downs. Cowboy up gents.
    Sometimes you get the elevator, sometimes you get the shaft.
     
    Real Money and Axon like this.
  3. New class???
     
  4. BKR88

    BKR88

    Millionaire retail traders also discovered the power of options after Softbank pumped the Nasdaq by purchasing large quantities of OTM calls in certain stocks.
    GME 117C x 100 can be purchased from the market maker for ~$64K with a delta ~50 forces the MM to purchase ~$1.1M in GME stock. Nice leverage!
    Do that with a small/medium cap stock with decent options and suddenly a small group of retail traders move a stock like a large hedge fund.
     
    terzioglu likes this.
  5. easymon1

    easymon1

    class that’s really getting the topics right?
    yeah baby.jpg
     
  6. comagnum

    comagnum

    When retail investors like Roaring Kitty & DeepF*ckinValue collapse a whale hedge fund it says a lot about Melvin Capital's piss poor risk mgmt.

    Some hedge funds reported making huge profits from the stocks that the Reditt investors/traders got all the credit from in the media.
     
  7. RedSun

    RedSun

    Ya. The pros take advantage of the day traders. Who gets more money?

    The MEME stocks are different. Pros do not even like those shorter selling funds. They are in the minority. Most pros like to see those short seller funds burn down.
     
  8. VicBee

    VicBee

    First observation - poorly written article.
    Second observation - why work for even $15/hr when trading a few hundred dollars gets you a weeks pay... consequently, unemployment is at its lowest while businesses are struggling to find labor and create inflation with $25-30/hr pay rates.
    America's 18-35 age group forced to stay home due to covid have transformed the world of professional trading and turned the stock market into a gambling den (or maybe they just removed the veneer of professional trading) thanks to retail trading platforms' ingenious ways of allowing "free" trading.
    The consequences to the economy and society are yet to be fully understood, as this is a multi edges sword. But my sense is, those in power, in government and finance, are concocting a correction that will reset things the way they should have organically evolved before covid hit. It's understood that what were $10/hr jobs can't suddenly become $30/hr jobs or that day trading from home with a few hundred dollars cannot beat working 40 hours a week. I wouldn't be surprised if $7 trading fees reappear and more stringent rules on margin will "incentivize" this labor force generation to go to work. I also don't expect the shake up to be gentle.
     
  9. Overnight

    Overnight

    What planet do you live on? Why were America's "18-35 age group" forced to stay home during the pandemic?

    For the last two years, did you go outside and then public places? Like restaurants, retail stores both big and small, car dealerships, supermarkets and pretty much any service-based business? Were they OPEN for most of that time? Yes. Are you saying that all of those workers were 40-YO and over? I would think not.

    Dude, nobody was FORCED to stay home. The LOCKDOWN lasted for a couple of weeks in March of 2020. After that, people CHOSE to stay home. The rest went back to work and wore the mask, used hand-sanitizer, and washed their hands when they got home.

    DUH!
     
    timtrader likes this.
  10. VicBee

    VicBee

    Well, actually I wasn't in the US for the past 2 years so no, I don't know how much the retail economy was impacted by covid, but it sounded pretty bad.
    While tough guys like you thought nothing of catching a little cold that could send you in intensive care, I know plenty of businesses, schools and colleges that shut down and required their staff and students to stay home for the last year and a half.
    But the point I was making wasn't about forced or not forced, but the fact that unemployment is near historical low while employment needs are near historical highs, so clearly, people don't need to work because they've found alternative income sources.
     
    #10     Jan 17, 2022