The Retail Investor

There has been a lot of talk about the retail investor with the way meme stocks have rallied.  Retail investors also drove the interest and market cap in cryptocurrency.  Institutional investors generally don’t respect the retail investor.  They see them as cannon fodder and a place where they can get juicy margins.

I really don’t care for the way the SEC limits retail.  With regulatory hurdles, the SEC makes it harder for the middle class to build wealth.  The middle class looked at speculative venture investors getting wealthy and were locked out of the market.  I think that is one of the reasons cryptocurrency took off the way it did.  There was a risk appetite that wasn’t being satisfied by traditional markets and in many cases, regulation got in the way.

In a way as an old floor trader, I empathize with the retail investor.  We used to be viewed as a bunch of schmucks with colorful jackets by institutions.  Most of the guys on the other end of the phone lines that connected the world to the floor didn’t think too much of the guys in the pits.  They always thought they were getting ripped off.

I remember once around 1990 a friend of mine made a market in a Eurodollar three month back month spread.  Goldman hit him on 1000 contracts.  He carded them up and remade the market.  They sold him 1000 more.  He carded them up and remade the market a tick lower. Goldman sold him 500 more on the downtick thinking they could press. The Goldman guy yelled at the pit and said, “Who the hell is buying all these things?”  The clerk shouted back, “One local.” Then, he gave the hand signal that it was a local buying by circling a finger over his head.  My friend carded them up and remade the market a tick higher.  They hit him on another 1000.  He carded them up and turned the cards into his clearing firm.  We went to breakfast.

Since 1990, we have given lots of technological tools for retail traders to do research.  In 1990 if you wanted to do a lot of research on stocks, bonds, or commodities it was difficult.  You probably had to pay someone for the access to data and who knows how they massaged the data before you received it.  There are blogs, forums, and all kinds of social media platforms that transmit information to investors.  Heck, how many business television stations are there today?  Back when I started trading you had to flip all over the dial to find one.  There is a lot of junk and bullshit on those blogs, forums, and platforms too and it’s up to the investor to discern what’s good and what’s not.

We also can access the market on our phones.  When I placed my first trades back in 1980 there was a whole process of paperwork, wiring money, and setting up an account before I could trade.  It took days.  After that, I had to call my broker and the broker placed the trade for me.  I actually had a very good broker named Sherwin Goldstein in the Oak Brook Dean Witter Office.   I was a fuzzy 18-year-old kid investing my college loan money which was legal at the time.  He was kind enough to meet me in person a couple of times.  Between him, my success investing, an old football coach that brought me to the floor, and a class I had at Triton College with Mr. Brandt where he showed a film of what it was like to work on the floor of the NYSE, I was hooked.

By the way, if you haven’t made the connection, technology enabling the individual investor includes the assumption that the individual investor can decide for themselves.  That’s not very different than the Bill of Rights and the basic tenants of free-market capitalism by the way.  That system implies you can decide better for yourself than a central authority.

Another big change has happened since 1990.  Exchanges once were private domains owned and operated by members.  They were structured as “mutual organizations”.  They were run for the benefit of members but the members had to balance their own benefit with the needs of outside investors.  Institutions and retail investors were integral to the members receiving the benefits.

I knew a guy named Barry Lind.  Barry passed away a while ago but he was a giant in the futures industry.  He set up a commodities brokerage in the 1960s called Lind-Waldock.  Barry once asked for a meeting with me.  I went to his office and we sat down and chatted for at least an hour and a half.  Maybe longer.  It was such a wonderful conversation and Barry emptied his brain with me educating me about the retail investor.

While not an expert when I left his office, I sure had a lot more knowledge and empathy about retail than before I walked in.  It changed the way I looked at market structure.  Essentially, in most markets, if you cannot get the retail guy to play you won’t have a successful market with network effects.

If you follow what’s called the “hot money”, it sloshes around from market to market. I knew traders that would follow it from pit to pit and exchange to exchange.  As a trader, if you could predict where the money was going to go before it happened, you could make some money on the momentum the hot money would create.

Once exchanges went public, the economic incentives of the exchanges changed.  Instead of being for members’ benefit, they were focused on top-line revenue.  Retail investors do not create a lot of top-line revenue because they don’t trade as much as institutions.  The board rooms of the exchanges don’t have representatives that actively advocate for retail.

Recently, there has been a ramp-up of exchanges that cater to retail investors.  The Small Exchange in Chicago is but one.  Do you want to make a bet on inflation?  Go to The Small Exchange and buy some treasuries. Instead of having to figure out the yields as you do at the traditional exchanges, The Small Exchanges do the math for you.  Prices don’t move inverse to yield.  Costs you a few hundred bucks in margin to make a little money on your opinion.  The recent introduction of e-micros by CME is a tip of the hand to the power of retail.

Often, retail investors are first to the game.  Institutions follow.

The meme stocks are a drop in the bucket.  They are a shot across the bow of the institutional boat.  I think this is a much longer-term trend than most people think.  The trend also fits in with other trends and undercurrents in society where institutions are being torn asunder by a populace that has seen what they are really about and is upset.  The populace has been enabled by information and technology to take action.

Regulators will be late to the game and due to regulatory capture will try to stop it.  Many officials at the top of institutional structures and non-government organizations won’t see it.  They will be content to sit on panels at forums all over the world and opine.  Detractors will point out that tulip bulbs were very valuable once too.

A lot of money will be lost by retail investors. They will put their money into things that are stupid.  Hot money does that sometimes.  But more people will make fortunes by investing or just simply make a living than did in the past.

A lot of the experts and officials have crowed as the price of Bitcoin drops which is a bell-weather for all cryptocurrencies.  In the extreme, a successful and thriving cryptocurrency sector is a direct threat to the entire traditional banking, insurance, and exchange system.  Technology and crypto enable individuals and individual liberty.  I don’t think the extreme will happen but I do think that the traditional titans of the financial services industry will have to figure out how to play nice in the sandbox with the newfound power of the retail investor.  It makes them uncomfortable.  I like that.

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