Welcome to the age of nonlinear market and trade surveillance requirements for quixotic markets, writes Sam Tyfield, partner at law firm Shoosmiths.
In the latest chapter of the book being written about the impact of retail trading on markets, the FT looks at what the “professionals” believe is the impact and future of retail trading. Some interesting statistics here, especially when comparing the last boom in retail trading with the current situation. In the era pre-Dot Com Bust, the average age of traders and the average amounts traded were significantly higher; now it is Covid stimulus cheques that are being put to work in the markets by Gen Z-ers, not retirement funds by the middle-aged.
The interesting point though is the anticipated long-term impact.
1. Fundamentals really do not matter anymore, even if they did previously.
2. The retail trading appetite and impact are going to need to be factored into models.
The first is what it is. The second could be problematic.
How does one model traders moving “from one hot theme to the next” and “slot them into the money equation” especially if (as Charlie Munger said, albeit controversially recently) it’s a “frenzy” led by a “new bunch of gamblers” with the “mindset of racetrack betters”?
Alternative data, maybe? I’ve mentioned that before, and not kindly, but the paradigm has shifted and if brighter people than me can identify patterns, anomalies, correlations, indicators and contra-indicators, then I wish them well.
One alternative is more troubling: that of “legacy” market participants giving the retail traders an ever-so gentle nudge now and then in the right direction. Clearly, the causes of the most recent spikes in trading various stocks and commodities have not been determined, but wouldn’t it be too surprising if it was found eventually that some anonymous Redditors were in fact professional quants or PMs and/or that there was a pump-and-dump-type scheme mixed-in with the short squeezes.
But then again:
- if one wanted to hide a pin, the best place to do it would be to put it in a pin cushion and then put the pin cushion in a haystack; and
- I am not sure that anyone is looking for the pin currently anyway – far better (from a political perspective) to focus on Mr Munger being “disappointing and elitist”, on PFOF (payment for order flow) and neobrokers’ systems and controls.
This all ties back into trade and market surveillance (whether by MMs, brokers, buy-side or platforms): “do I have enough information about any order to determine whether it or the “person” (ultimately) behind it is a risk to me, my other clients, its counterparty or the market and do I have enough information about my entire order book to identify systemic risks before they emerge?”
There are tools available to layer datasets upon datasets to give a fuller picture and ISVs (independent software vendors) that provide them; other surveillance issues, such as BYO (bring your own devices) and WFH (work from home) are in the spotlight and operational resilience is a hot topic.
None of these are distinct and need to be looked at in the round.