Stock market gamification unlikely to end soon

The stock market gamification seen in the Robinhood-GameStop trading saga is unlikely to end soon or draw major near-term regulatory actions, according to a major new report published by Bloomberg Intelligence (BI), North American Gamification of the Stock Market Report.

Retail investors are a major force, accounting for 23 per cent of US equity trading volume, and could provoke further "meme" stock gyrations, says the BI report. Greater Robinhood scrutiny and higher Depository Trust and Clearing Corporation (DTCC) margin requirements could curtail some gamification practices and force traders to shift venues, but may not alter their appetite for heavily shorted or lower-priced securities.

Larry R Tabb, BI Director: Market Structure Research, says: “Lawsuits against Robinhood, Charles Schwab and other brokers have little chance of success, we believe, and potential enforcement penalties are likely to be low. A congressional review adds to the drama, but new regulatory risk is probably minimal.”

The recent volume surge led by GameStop and AMC Entertainment has boosted retail-investor participation to 23 per cent of US equity trading from 20 per cent in 2020, based on BI’s calculation.

The massive increase in retail trading of "meme" stocks made popular through social media is reflected in over-the-counter (OTC) volume, benefiting the four largest wholesalers (Citadel Securities, Virtu Financial, G1 Execution/Susquehanna and Two Sigma Securities) and order-flow payments.

“Though interest in meme stocks will likely dwindle and reduce our retail-share forecast as the year progresses, the GameStop and AMC frenzy confirms retail's ever-increasing portion of US equity share volume,” says Tabb.

US equity-share volume jumped 55 per cent year-over-year in 2020 but value traded only increased 49 per cent, reflecting a retail preference for lower-priced stocks that traditional institutions often can't touch.

The six percentage-point gap may seem insignificant, says the report from BI, but demonstrates the growing influence of retail investors. Covid-19 disruptions pushed many to reallocate positions, created a new wave of day traders and upped the activity of experienced traders.

“The short-squeeze on challenged store chain GameStop by an army of retail investors could intensify scrutiny of short-selling regulations and the options market where many of the trades occurred, and support cries for financial transaction taxes. We believe such taxes would be devastating to investors if legislators seize upon perceptions of market manipulation in the GameStop frenzy,” says Tabb.

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