The Equity Market Implications of the Retail Investment Boom

[Spekulatius]

I found this fascinating paper in a Reddit link:

https://poseidon01.ssrn.com/delivery.php?ID=484029088111001006073096089006124072016089038039060053007117008027101109086070094109010114056102019017037122126017076092001119048032033082076106112103120089107007108007092010066127087083116113078084112013080121119068105018026076012080024093073071113085&EXT=pdf&INDEX=TRUE

 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3776421

 

Third, we assess the return implications of the surge in retail trading activity for individual stocks within the S&P500. For these stocks, Robinhood traders hold a relatively small fraction of the total shares outstanding. We show that they nevertheless provided considerable liquidity for some large individual stocks in Q1 and strongly amplified their subsequent recovery in Q2. The strong price impact is driven by the fact, that these stocks are primarily held by large, passive investors with strongly inelastic demand curves. These findings shed light on the recent events in January 2021. While GameStop was subject to substantial short interest by hedge funds, the majority of its long investor base was primarily inelastic. We find that, as of July 2020, buying 10% of GameStop’s shares

outstanding would translate into a 57% return.

 

 

[ValueArb]

So the report is saying that Burry and the other longs had diamond hands that they were able to dump on to Redditors at insane prices?

 

Frankly I'm amazing that Senvest and Burry were able to hold out until the multiple hundreds. I probably would have sold at $20, but I guess thats what makes Michael Burry a G.O.A.T. and me, me.

[bizaro86]

No, Burry didn't ride the GME squeeze. He sold out of his GME stock position well before the squeeze. He may still have had call options but he definitely didn't ride the stock in size beyond the $20 handle (which is still a very good outcome).

 

https://www.sec.gov/Archives/edgar/data/1649339/000156761921003819/xslForm13F_X01/form13fInfoTable.xml (13F as of Dec 31,2020)

https://www.sec.gov/Archives/edgar/data/1649339/000156761920019679/xslForm13F_X01/form13fInfoTable.xml (13F as of Sep 30,2020)

 

Yeah, Burry sold out during Q4, which isn't really a surprise, imo. Some discussion here:

 

https://seekingalpha.com/article/4406847-assessing-michael-burrys-portfolio-changes-after-profitable-gamestop-trade

[Spekulatius]

Her is another economic paper about how flows impact equity prices. They found similar results than above: $1 in markt flows will cause a $5 rise in equity prices.

https://www.nber.org/system/files/working_papers/w28967/w28967.pdf

 

One should note that this model assumes that investor allocate more or less independent of valuations, which I think is fairly correct.

 

Edited September 22, 2025 by Spekulatius

[brobro777]

54 minutes ago, Spekulatius said:

Her is another economic paper about how flows impact equity prices. They found similar results than above: $1 in markt flows will cause a $5 rise in equity prices.

https://www.nber.org/system/files/working_papers/w28967/w28967.pdf

 

One should note that this model assumes that investor allocate more or less independent of valuations, which I think is fairly correct.

 

 

 

Yea baby bring on those punters with iphones and brokerage accounts who wanna leverage themselves to the eyeballs! I've seen more and more advertisements marketing futures and options targeted to retail and here comes... 24 hour trading! 

 

This year's April tariff sell off and the bounceback could look like tiny waves in the future

 

haha yes

 

oh man haha

 

 

[alpha]

5 hours ago, Spekulatius said:

Her is another economic paper about how flows impact equity prices. They found similar results than above: $1 in markt flows will cause a $5 rise in equity prices.

https://www.nber.org/system/files/working_papers/w28967/w28967.pdf

 

One should note that this model assumes that investor allocate more or less independent of valuations, which I think is fairly correct.

 

 

 

FT recently did an interview with Jean-Philippe Bouchaud who is a big proponent of that paper. I think he wrote a paper last year that claimed 500mil per day is reallocated as a result of self-inflated ETF flows alone. 

[Spekulatius]

2 hours ago, alpha said:

 

FT recently did an interview with Jean-Philippe Bouchaud who is a big proponent of that paper. I think he wrote a paper last year that claimed 500mil per day is reallocated as a result of self-inflated ETF flows alone. 

Yes, I got this paper from a thread on X that mentioned Bouchaud. What is fascinating is this is is a macroeconomic paper while the initial topical was about meme stocks, but the multiplier (% price increase / percent inflows) is quite similar (5:1 and 5.7:1) for both.

 

We know that meme apes are not investing based on valuations but what this implies is that the entire stock  market works a bit like a meme market as whole (investing independently on valuation). Fascinating stuff.

Theoretically, if the market would consist of only die hard value investors that look at valuations, then inflows would not change the prices/ valuations  of stocks at all because value investors would just refuse to buy, just like Buffett keeps his stash in cash if he does not find anything to buy at the price he likes.

 

However, as we know people do change their behavior at times some can guess that at some point, people may move funds out of stocks and the 5:1 multiplier works in reverse just as well. I guess thats the reason why valuation and stock prices can change so much, while index as a whole show low volatility most of the time. We see this more with individual socks as I guess people sell just one stock and buy another typically. Index funds put money to work mechanical and just basically follow the momentum.

Edited September 22, 2025 by Spekulatius

[TwoCitiesCapital]

4 hours ago, Spekulatius said:

Theoretically, if the market would consist of only die hard value investors that look at valuations, then inflows would not change the prices/ valuations  of stocks at all because value investors would just refuse to buy, just like Buffett keeps his stash in cash if he does not find anything to buy at the price he likes.

 

However, as we know people do change their behavior at times some can guess that at some point, people may move funds out of stocks and the 5:1 multiplier works in reverse just as well. I guess thats the reason why valuation and stock prices can change so much, while index as a whole show low volatility most of the time. We see this more with individual socks as I guess people sell just one stock and buy another typically. Index funds put money to work mechanical and just basically follow the momentum.

 

This has been a recent thought of mine - stocks may have moved from being a leading indicator to a lagging one. 

 

If most incremental flows are passive, and valuation agnostic, the new flows just hit the bid ever two weeks and bump up the market with every new crop of bi-weekly 401k contributions. 

 

What stops that? Well flows will be reduced when some hit financial hardship - like one or one's partner being laid-off/furloughed/hours reduced as contributions stop or are reduced. Once that starts happening, the retail audience who pays more attention to markets may see the drop starting, the bad news, etc and follow suit. But that means it all hinges on employment (lagging indicator) and not on any foresight of earnings growth. 

[Spooky]

7 hours ago, alpha said:

 

FT recently did an interview with Jean-Philippe Bouchaud who is a big proponent of that paper. I think he wrote a paper last year that claimed 500mil per day is reallocated as a result of self-inflated ETF flows alone. 

 

This interview was super interesting. Did you manage to track down the paper Bouchaud wrote?

[Cigarbutt]

2 hours ago, Spooky said:

This interview was super interesting. Did you manage to track down the paper Bouchaud wrote?

This response is more omega than alpha but here goes:

https://arxiv.org/pdf/2405.12768

A picture is worth a thousand words:

Using the word Ponzi is eye catching but there may be more than meets the eye?

-----

These "quant" papers are indeed fascinating and the underlying math (if one has too much time on their hands) is interesting. But.

There are (opinion) obvious conceptual flaws and very permissive assumptions. The way they adjust for flows given the circular nature of money movements is technically elegant but practically questionable. The above assumes that money that leaves chased-after funds will tend to re-enter to-be-chased funds but that's really nothing new (apart from a larger scale) and is simply part of the hard to assess (from an individual timing point of view) momentum/sentiment component of the 'valuation' equation. It's kind of similar to the reflexive aspect (Soros) of market action. Sentiment tends to reinforce fundamentals, up (and down).

[Intelligent_Investor]

I think a bigger issue is that if a large % of all investments in companies composing the total market index are passive/long term, then silently the index is inherently leveraging up as more and more investing becomes passive/automated leaving a very small portion of investors to set the price. So investing in an index fund isn't actually investing in the S&P 500 but rather 2x or 3x (or more) of the S&P500. 

[Malmqky]

9 minutes ago, Intelligent_Investor said:

I think a bigger issue is that if a large % of all investments in companies composing the total market index are passive/long term, then silently the index is inherently leveraging up as more and more investing becomes passive/automated leaving a very small portion of investors to set the price. So investing in an index fund isn't actually investing in the S&P 500 but rather 2x or 3x (or more) of the S&P500. 

 

This is a very interesting point. I have nothing to add here, but I did not consider/realize this...thanks for bringing it up.

[Red Lion]

49 minutes ago, Intelligent_Investor said:

I think a bigger issue is that if a large % of all investments in companies composing the total market index are passive/long term, then silently the index is inherently leveraging up as more and more investing becomes passive/automated leaving a very small portion of investors to set the price. So investing in an index fund isn't actually investing in the S&P 500 but rather 2x or 3x (or more) of the S&P500. 

 

That's an interesting point of view, and it kind of reminds me of the situation with real estate right now where there's historically low sales volume which creates more intense supply/demand issues for the available transactions. 

 

But at some level, the actual underlying investment in your case isn't leveraged 2x or 3x, but maybe the trading of active value conscious shareholders is leveraged at 2x-3x in the short term. Maybe this is the ultimate long term setup for value investors when we have our next huge market drawdown at some point in the future. 

[Longnose]

50 minutes ago, Intelligent_Investor said:

I think a bigger issue is that if a large % of all investments in companies composing the total market index are passive/long term, then silently the index is inherently leveraging up as more and more investing becomes passive/automated leaving a very small portion of investors to set the price. So investing in an index fund isn't actually investing in the S&P 500 but rather 2x or 3x (or more) of the S&P500. 

Makes me think of Burry's prediction back in like 2021 or something like that. That we are in an index bubble.  

https://markets.businessinsider.com/news/stocks/peter-lynch-big-short-michael-burry-passive-investing-stocks-bubble-2021-12#:~:text=Wall Street legend Peter Lynch,value stocks and shareholder activism.

[brobro777]

https://www.cnbc.com/2025/09/24/day-trading-is-about-to-get-easier-for-smaller-retail-investors.html

 

haha yes

 

 

[tnathan]

$virt