« Exchanges at Goldman Sachs

Special Episode: The Rise of Retail Investing and Its Impact Across Market Participants

2021-02-04

In this special episode, four leaders across Goldman Sachs—Raj Mahajan of the Global Markets Division, John Marshall of Goldman Sachs Research, Lizzie Reed of the Investment Banking Division, and Greg Tuorto of Goldman Sachs Asset Management— discuss the historic rise of retail investing and its profound implications for market participants.

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This year, Exchanges of Goldman Sachs, where we discuss developments currently shaping markets industries in the global economy. I'm you go ahead of corporate communications here, the firm, the region. investing phenomenon has really taken off and is accelerating. Perhaps it's best illustrated by the fact that twenty four billion shares were traded across. U S exchanges last Wednesday, which broke the prior record, set in October, two thousand eight by nearly four billion shares. Today we have a special episode where WAR dive, deep into the rise of retail, investing in its profound implications for market participants will leave room for gas different divisions: you're Goldman Sachs, John Marshall derivatives, research for Goldman Sachs Research will kick it off. Then from Raj cohesion global? Have systematic trading from our global markets? Division reg tore down
portfolio manager for Goldman Sachs Asset Management or G Sam, the fundamental equity team there. Lizzie read of the equity capital markets, syndicate desk in the firms, investment, banking vision. So what are today with John Marshall, as I said, he's head of derivatives research to discuss what's driving the unprecedented surgeon retail trading and what the impact has been on market dynamics. John welcome to the programme. Thank you thanks for having me Jake saw been John, a remarkable uptake in retail investing over the past year, particularly in the past few weeks, the start of two thousand twenty one and that's activated the attention of the masters I mean it's even made its way to set out live. So mainstream now, so just give us off talk a little bit about the back. drop here, give a sense of how much of the? U S. Equity market is owned by individuals compared institutions and how figure has trend it overtime. He asked
absolutely true that retail investors have become more active over the past year and that activity is broadly picked up over the past month. Households have direct ownership of a thirty five percent of the equity market. so this is long term holdings that they dont trade, actively. There's limited public data on the precise size of retail investor trading. That's why it's such a hotly debated topic and we take a big deal. The approach of analyzing every trade in every stock each day, and this helps us track the trend. What we find is a retail investor ownership through each he ass is growing very steadily, and this is really by and hold activity and diversified vehicles in single stocks. It it's a little bit less clear how long the investors are holding these names. Part of history Is it individuals own more the stock market now than they have historically been There are also becoming more active traders. Talk about that dynamic! Tabs they for the largest online brokers? The number of daily trades has tripled since twenty
nineteen, but this Mainly been driven by a small portion of their customer base these, traders are less than ten percent of their customers, but they represent more than half of their trades and the vast majority of retail brokerage customers still only trade a few times a year. Now among these very active traders, most open and close their positions within the same day, so there's limited ongoing risk on it. positive day could be that fifty two percent of trade, thereby orders and forty eight percent of trades or sell orders, which I think is a little bit different, then how most people perceive retail flow based on what they read on the internet. I believe that their picturing flow It is far less balance. Our analysis of small trades suggests that the dollar value of retail trading is up eighty five percent over the past year, of course, if the number of trades is up three hundred percent and the value of those trades is up. Eighty five percent. This suggests
but the new traders are trading in smaller size than retail traders a couple years ago, At the same time, the body of trading with institutional investors has also gone up all, traders are training more and retail investors now account for about twenty to twenty five percent of the value traded in the market on an average stay up from about fifteen to twenty percent a year ago. In this broader perspective, can see that retail investors are participating in this market rally and at that level of participation is indeed accelerating, so something it's called the attention peoples, the use of options. Retail traders have been particularly active in the use of stock options on single name stocks, explain the impact of the options on current activity and how the use of options has evolved over time. Yeah options here, two interesting features that attract investors to them leverage, and and pay out now investors in stocks can gain leverage by borrowing money through its called a margin account in there,
a short term loan from a broker, as standard and the investor pays interest on that loan out by call option can also be considered. Leverage as investor gains, control of a larger quantity of shares than would otherwise be possible and pays an implicit interest rate and time to care for that option the investor that buys the call option, can lose their entire premium, but also has the potential to make multiples of that premium if shares rise substantially the access to leverage through options can multiply the buying power of any investor and can lead to activity in the shares market. That exacerbates both the up and down moves. As the market makers, hedge the other side of the trade. leverage, combined with us subsequent when hedging activity is why investors are particularly focused on options activity in single names.
if you really dig down waving, is driving the rise in retail, investing, there's a lot of speculation and talk about the fact that people have more time in their hands during the pandemic and they spend more time trading. But beyond What are some of the factors that play that contributed to the rise and growth of retail investing? He asked in question are not sure, there's a really neat answer to it retail investors from our studies. We know that they buy stocks when the stock market attracts their attention and when have money to invest. Now. Over the past year, the equity market has been unusually volatile and the nature the pandemic has driven some companies to rapidly expand and others to go bankrupt. The high volatility the market means that investors that buy and sell at the right time have the potential for unusually large profits and, of course, unusually large losses, many investors, try to avoid volatility through long term investing in diversified vehicles like mutual funds in each he asked, but when investors see testimonials of others that have
size returns, their attracted the more speculative trading strategies, the pandemic. had a diverse impact on individual finances as well, while many people are hurting physically and financially. Some are working from home, as you mentioned, and there more time on their hands. They get stimulus checks along with their normal paychecks and looking to make that increase savings productive now they see zero commission stock and option trades that are made it easier than ever to invest their money and they looked trade starts in the stock market and we think All of these items can play a role in the big increase in retail trading and its incremental increase relative to institutional investors trading, just an alert couple weeks, there's been enormous amount of talk about regulation of retail trading, apps and platforms. What do you expect to happen there, and, what's next, more broadly, for retail traders in the market, that kind of comments or recommend any future regulation. I think that
important to note that trading of stock and options by both individuals and institutions is highly regulated? Clearing houses helped to ensure that broker and clients have enough collateral to cover their trades in stock options. This helps to ensure that when a trade is made on an exchange that investors trust that the shares are options will be delivered now, where Sack and options are highly volatile over a short period of time. It's in the interest of all market participants that these regulations are followed, while can lead to situations where stock and option trading is intentionally slowed down like trading halls,
stop drops to rapidly these rules have developed over time to help ensure the markets function correctly. Even when they function a little slower than people would like a really the bottom line from our work is a retail investor activity is rising along with institutional investors activity. This activities very focused in specific names are most of their names are typically large companies, occasionally for a period of a few days or weeks. Smaller names will grabbed the attention of investors for the two the long term fundamental investor enlarge cap stocks. We don't see any concerns from the recent chance, but it's something that were watching closely can clearly a matter for more short term oriented clients. all right, John something to keep track of thanks for joining us today, thanks ravening wheel, I turn to Roger cohesion, who works with the hedge fund community, in his role as global. Had a systematic trading here, Goldman Sachs Ross going to talk about the knock on effects there.
funds are seeing as result of the retail activity and how expects market structure may change going for a welcomed. The problem I gave you so Roger S. I just mentioned you work with a hedge fund merely which has been a target for some in the retail trading search, you John. engine that retail households on about thirty five percent of the equity market has significant. Top trading compared hedge funds in the stock market, Gazprom, a distinction so between ownership versus average daily volume right now we're small retailers about twenty percent of the average. Dear boy, you in? U S, acquiesce in that's off from Jake about ten percent let's call a year ago, and so what of that site is observed, commissions deep work from home time to trade theory, and so now you ve got twenty percent of all. You is retail and as we from last week? They can be farmer coordinating our rights,
how does the retail investor interact with market makers and how those price is different from the way typical institutional investors transacting market. They are indeed different retail orders around to market makers, and then market makers act as either internalized, meaning that they may get a byword of retail institution, and then I guess I'll order, and then them up, and internalization or they may route that were onto the? U S, equity exchanges, and so that's you need that's different. That's also governed by two other economic properties. One is payment for order, for I've heard that the press market made hey Retail, for those orders and they also provide them with what they called price improvement. Ok
hedge funds that follows one short fundamental strategies were the ones that were most affected initially by the recent price action volatility and forced to cover some short positions has a fact. The outlook for hedge once that follow longshore strategies and beyond that of seeing any impact in the systematic headphone community. The short answer is ass, theirs deftly impact in I'd, say last week was historic in that the volume of activity that we saw around short, covering with significant, I think, the way the question now relates to the earlier questions about retail. Is it a hedge fund in your engaged in the practice of shorting? That's for your business, smaller you're running a long book in a short book and you're relatively balance. You have certain view of Hamish risk. Any single name short position could be But what we learn last week is that the risk models can contemplate a ten next move in the short against year or a twenty Exmoor in sport against you, though, I think what for Hash
What business triggering is How do I have to evolve my wrist models to ensure that their shores, I'm putting on are in fact I figured out how bad acre run against me, one of the things that are jumps off the page when you start to look at this- and I think those are questions that are being asked in aspen circles. Right now is how to be above the practice of shorting in light of. what happened last week. It is forbidden. Soon to tell exactly how this computer right Roswell, I'll, be back in a few months and will see how the landscape is involved and what conclusions we can draw from this past month. But thanks for join yesterday, there was The basic next applicants which gears to discuss the implications for investors who favour more long term approach to do that. Joined by Gregg Toto, a portfolio management, Goldman Sachs Asset Management, Folkestone Fund, now, equity gonna topple a bit odd, his perspective on the impact on the institutional investing community and what comes next,
welcome to the programme. Aw erosive portfolio management policy focused on longer term returns, but you can't help but I've seen the impact in the mutual funds that your managing of the retail boom cried the impact that retail trading activities had on funds, Anita S, yeah Jake, it's really interesting, My focuses on smaller tat companies know those under your fifty billion dollars and market value, and it's really unique because that's not usually where you see the interest from people focused in on had usually in some of the larger names here from the larger kept grove names which had been the other stuff The market for the last three years have been where people expected us of the real challenges to be so you're in the impact. We ve seen it's been pretty interesting. It's your has been focused on what the consumer names, especially some of the ones that have been seen as structurally challenge some pride, The pandemic in some because of their pandemic had had increased
your challenges and you watched a lot of those dynamic start to change, and some companies had seen a bit of recovery did not, and it seemed to be that were the ones that the retail dynamic it really been focused on and for us been a really cute issue for the most part, as you were on the growth side of things in your life, companies have been really more classified in value as they say, but it's something he had to pay attention to to make sure. No, because arrests around you ask to rise in the market is varied connected as you know it. Make sure that your risk that such were taking, we once a conscious, not a better view and have just letting sit out there. So great One thing there's been a little bit unusual about this rally is the speed at which individual investors have driven up price of somebody, stocks that you are talking about, and certainly the role that social media is played, driving that momentum described for us, the different Between that approach and the investment approach, the institutional investor like yourself, takes yet spin interest.
The social media aspect of this reminded me of my earlier stage, my crew in the yard message boards, which people paid a lot of attention to back in the day and it been sort of a unique aspect, as these people tend to share ideas and ensure their peaches here, which is the exact thing they get upset some these hedge fund managers when they come on tv and talk about those things. So it's whichever way you're sitting at the wonder, goes this way, go dogmas that way from good fellows line in many of these instances, and you I think that the mark it has, especially in somebody smaller names shown its inefficiency and I think that that something that we try to take advantage of phenomena like what expressions walk outside, but I take that forward retail investors. Small investors, I think they're looking added more along the lines of your kind of a price equivalency geology. What about different than what we do? Yours is more focused on you're, gonna revenue, earnings and free castle, the company and what we can mine aloud, and I think that your sometimes when we see something that sort of left for dead
but these names have been your, we leave it, there will be a lot of attention to it and I think for them. It was an opportunity, and I think that that opportunity created so that heat and noise roman drawing of you will really attracted more more of them. So, some of the moves in the prices of individual stocks. I've been eye popping and somewhat reminiscent of the dot com boom in the late 90s 1990s. That is, do you see any similarities or differences between those two periods? I don't for say, because I think that they were not in many cases see. I think the lot of those companies that have those big move tripos and you had a lot of that dynamic. Were people really had that you'll? What we call now form our fear of missing out was a big driver of those moves sitting. Today, it's been more about the short interest, then how short interest was utilizing and weapon Ized violently retail traders to make sure that these names had bigger moves, and you have any of you look through some of the different dynamics of some of these different companies that have had those I popping
she'd say that neither short interest was large and many cases lazy. I thank you where people work, your kind of the grinding these things into the ground as opposed to China, say: okay, the plays over let's move on, and that creates The dynamic were risk starts to come in if your edge one risk manager, you gonna? Let me thanks sit there you making those best without a lot of pieces behind it. I think that Europe, because of that, because a relatively calm market cunning coming the earnings we had a period were in a marked roads, We com. People waiting for news was a lot going on these things. To be a sort of the protein typical, very dry tender waiting for a man to night them, so Gregg. It strikes me that retail participations odyssey big factor now in certain stocks is the stent of retail participation, of factor that you look at when you're deciding how to value optical equity something we're all gonna look at a little bit more closely going forward. I think in the past now you looked at their participation,
helped his patient, somewhat larger companies It was around the smaller companies, really didn't look for reach. Optus patient because the volumes warns large near the market. Catherine, is large. You don't really think that that was something you have to pay attention to a worry about. Adding as we move forward, it's gonna be something that work all can be looking for. Alternative sources of data. The source of the truth around this. To make sure we understand your a percentage of the flow books. The ownership yellow like we look for any other company, is in the retail space not because it's a longer term or shorter term. Just me formed an understanding of what form the valuation is actually driven by that dynamic and what it may mean for the day. perform its characteristics. A stop may hold water what's earnings when it doesnt merger or when it doesnt equity, offering or something like that, all right. Thank you. for that explanation and pleasure to have you on the problem. Thank you. Jake was fun. Last
but certainly not least, we are going to talk to Lizzie Reed who works in our equity capital markets, syndicate desk in the investment banking division. Lizzy can talk a little bit about what the robust retail activity means for corporate clients were looking to issue shares and how she sees current market dynamics having an impact on issuance this year. Lizzy welcome back to the program. Wonderful, it's great to be back, so Lizzie, given everything that's going on with the markets with regard to retail. What are you saying to corporate clients where they asking about right now and what kinds of questions are ceos in their boards asking It's. Our jobs by its company is on capital structure. An important one help them achieve their objectives in the scope of the current financing conditions? At any point in time, so now
naturally given over all observing and markets in the past week, or so we received in bounds from corporates the sponsor NBC Community, as well as institutional investors. Some of these m are specific to corporate swimming impacted by recent retail treading activity, and we were closely with them across their capital structure and within equity is across the full suite of product offerings. Other and bounds or more generic and nature. I common question: we are asked is how long this technical last within the markets and what is a long term impact and, quite frankly, Jake there are still a lot of earnings to learn from a national market remains. Very very fluid, though, then? We are telling all our clients is retail flows and Rachel sentiment is something that we will all have to closely monitor in the coming weeks and months. So Obviously we are seeing a lot of activity and capital markets, but is retail activity having an impact on the way companies raise money in the equity market. Where is it,
the timing issuers there more dynamic just for the companies that are already trading soda? Put someone antics around that January of two thousand twenty one was the largest January in history for equity, related capital, market offerings, January's global volumes were a hundred and twenty nine billion. That's up a hundred and fifty percent plus Euro per year and within America's the region printed sixty three billion dollars of issuance so well. Last week's headline sternly resulted increase market volatility, really measured by the Vex new shoe offerings, you need to be met with strong investor demand. This is reflected in the so it volumes issued pricing dynamics and the average aftermarket performance.
the retail investor had been an increasingly important part of the market. Specifically in two thousand and twenty, and we expect them to be very active in two thousand twenty one. While we remain mindful of the recent train technicals, we believe the equity markets remain supportive, with strong underline fundamentals, so from our sea remained focus on the aftermarket, treating it back to the retail investor, whether its than existing public company, whose looking juries equity proceeds, a sponsor VC, whose contemplating modernization strategies or a private company who is going public, it's all so far, activity begets more activity before we close outlets. Look ahead, how do you, The current market dynamics having an impact on issuance windows going forward, so all it James Jake, about we highlight in the second half of two thousand to twenty in two during trill, so accommodative, said policy: the support of local governments vaccine optimism a low interest rate environment and important,
positive inflows into the equity ass, a class during the start of a strong earning season. With all this combined, we view the window for issuers remains open and we anticipate actively level swimming rebuffs throughout the course of the year alright Lizzie sounds Zaza busier ahead of you, thanks for joining us today. Thank you, shit, I appreciate it already. And thanks to order the gases well, John Raj Gregg, fastening discussion. That concludes episode of Exchange of Goldman Sachs. Thank you for listening and enjoyed the show. We hope subscribe and apple podcasting, liberating or comment. These two new later in the week for with the markets update for more on the latest in markets, this progress, has recorded on Monday February, first and Tuesday February. Second in the air,
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Transcript generated on 2021-07-01.