Retail investor ranks in the stock market continue to surge

Retail investors are continuing to jump into the market in droves even after the dust has settled from the GameStop trading saga.

The major online brokers continue to see elevated app downloads, well above levels from last year, according to JMP Securities using SimilarWeb app download data.

Millennial-favored stock trading app Robinhood saw app downloads top 2.1 million in February, a 55% increase from a year ago. While that was down from January’s banner month, where Robinhood saw more than 3.6 million downloads, the data shows the rookie investors are still coming into the market.

“App download activity that began 2021 with tremendous momentum, surging during the days of the Reddit/social media short squeezes, but has still remained well above average, even as the news cycle and traders’ attention changed,” JMP analyst Devin Ryan told clients.

Investors found themselves embroiled in a major trading saga with a number of heavily-shorted stocks, including GameStop, unexpectedly skyrocketing in late January amidst a boom in retail trading.

At the height of GameStop’s surge, Robinhood and other brokers restricted trading of certain securities due to increased capital requirements from clearing houses. However, the brokerages’ reputations seem to be intact. Fidelity, E-trade, TD Ameritrade, Coinbase and Webull all saw elevated app downloads in February.

GameStop is still seeing some wacky trading in March. The brick-and-mortar retailer popped 40% on Wednesday, for no apparent reason, and then turned negative minutes later. While the wild trading the occurred in January is unlikely to recur, the volatility could persist as retail investors grow in their overall influence in the stock market.

“We do think new app downloads and account activity will remain above pre-pandemic levels and the baseline for trading activity has moved permanently higher following the record number of new customers into the industry,” added Ryan.

Retail trading has been accelerating since the industrywide decision to drop commissions in the fall of 2019. Since then, the pandemic-fueled market volatility brought new investors into the world of stocks, sometimes for the first time. Work-from-home, stimulus checks and higher personal savings levels, as well as social media platforms like Reddit, have only accelerated the boom in retail trading.

Plus, web traffic on the major brokers continues to move higher and set new records, signaling that retail investors are trading often.

“We continue to see a tremendous opportunity for firms to capitalize on this elevated engagement to earn more of their customers’ wallet share over time,” added Ryan.

Institutional investors might have to start paying more attention to the little guy given their ever-increasing presence in the market.

By using “big data,” Goldman Sachs’ derivatives team determined that the dollar value of small-lot trades—a proxy for retail trades — has risen by 85% over the past year, leaving small traders a much more powerful market force, the firm said.

“The retail traders are becoming a much larger and larger component of overall volume,” Randy Frederick, vice president of trading and derivatives at Charles Schwab said on a webinar on Wednesday.

Goldman’s chief U.S. equity strategist David Kostin said the abundance of household cash should continue to fuel the retail trading boom. The firm estimates U.S. households have accumulated about $1.5 trillion in “excess” savings that should rise to about $2.4 trillion by the middle of 2021.

“With short-dated interest rates likely to remain near zero for several more years, retail investors are likely to continue to re-allocate funds to asset markets such as equities that have greater return potential,” Kostin said in a note to clients.

In fact, Kostin expects households to be the largest source of equity demand in 2021, with economic growth historically being the key driver of retail trading participation on the markets. Goldman raised its household net equity demand forecast to $350 billion from $100 billion on Sunday.

The hike “reflects faster economic growth and higher interest rates than we had assumed previously, additional stimulus payments to individuals, and increased retail activity in early 2021,” Kostin told clients.

The $1.9 trillion fiscal stimulus package is expected to pass this week and is set to include $1,400 stimulus checks, which could be used for securities trading.

Retail trading activity has also become a valuable signal for stock differentiation.

Stocks that see an increase in small-lot shares and options trading activity outperforming in the subsequent 5 to 10 days, Goldman’s derivates team found.

Schwab’s Frederick echoed this finding on Wednesday, saying retail traders having a great deal of success.

“By and large man of them are have done quite well,” said Frederick. “Buying dips has been a pretty effective strategy.”

— with reporting from CNBC’s Michael Bloom and Nate Rattner.