The Growth of the Retail-Investor Revolution
In the wake of the GameStop frenzy, there's been a lot of commentary about a retail-investor revolution.
There is a retail revolution going on inside the investing world, but it's a revolution years in the making. GameStop was merely the culmination of a process that has already seen three big stages, and my firm, Webull Financial, has been a major player. To put is succinctly, the three waves are: the move to zero commissions, the Covid-19 lockdown, and the stock market going viral.
The impetus for everything that happened over the past year was the brokerage industry's move to zero commissions. Robinhood was not the first company to offer zero commissions but it was the first to successfully recognize that an underserved demographic existed that most brokers wanted nothing to do with. These brokers felt that investors with less than $10,000 were a waste of their time.
With the rise of discount brokers and electronic-trading platforms over the past 25 years, commissions on a stock trade had fallen to $10 by the time app-based platforms launched with zero commissions in 2015; but that $10 was just the commission. That did not include all the additional fees typical of the industry, such as exercise/assignment fees, account minimums, and even a charge to speak with a representative to name a few.
At that point, a group of tech-savvy, upstart brokers, who had been working on app-based platform technology jumped at the opportunity to provide service to this demographic.
These upstarts were the true rebels, taking on the Wall Street wire houses, and creating a business model where retail investors would feel valued, instead of irritated from constantly getting nickeled and dimed.
The upstarts' vision was to launch products, services, and platforms that didn't have any of the barriers to entry put up by the big brokers. They removed pay walls, and other barriers such as commissions, minimum account sizes, inactivity fees and subscription services.
By the time Webull launched with zero commission trades in 2018, our peer, Robinhood, had started to gain lots of traction and momentum.
However, the "ah-ha" moment that vindicated this business model was when the market share Robinhood, Webull and the other upstarts had acquired, forced the market-leading platforms to take notice. In October 2019, Charles Schwab moved to zero commissions and pressured its competitors to match it.
When Fidelity, E*Trade, and others started advertising zero commissions on prime time TV, that opened the eyes of small investors and would-be investors, those who had never contemplated opening a brokerage account and buying stocks. This demographic group had been on the sidelines thinking, that stocks are solely for wealthy people because even at $10 these commissions take a significant part of the overall capital.
The idea that they could participate in the market took hold when this demographic realized, these new guys speak my language, and they let me trade on my phone.
The Covid Crash and Lockdown
The second wave progressed in two parts. The first started when the market got crushed last March. People saw an opportunity to get stocks cheaply. They remembered what happened when the market crashed after September 11th and in 2008. It surged. They said, I've seen this game before and I know how it's going to play out. After an 11-year bull market, this was the moment they'd been waiting for.
The second part was what happened in the wake of the crash: the pandemic lockdown. Suddenly people were stuck at home with a lot of time on their hands, and no sports to watch or bet on. As expected, the market did rally on a combination of the Federal Reserve's accommodative policies, Congressional stimulus, and a new technological revolution that had been 10 years in the making. The lockdown forced people to adopt Zoom and other work-from-home apps, whether they wanted to or not. They started spending time watching the stock market, and jumped into the world of finance. Stocks weren't just an investment, they has become a form of entertainment.
The third wave is the confluence of social-media and viral events in the stock market. Never in history have we ever had young people excited and talking about stocks, market performance, and portfolios. There are countless videos on YouTube and TikTok explaining the ins and outs of what happened with GameStop and AMC.
This is probably the strongest of the three waves. Most people in this country have a smartphone. Once an event hits the mainstream, it takes off and everyone talks about it. Everyone also has the ability to download an app from the App Store, open an account, fund that account, and buy a piece of a public company within minutes for free.
At this point, the retail-investor revolution to democratize trading has become the most dominant force in retail trading. Now people are watching to see if there will be another wave. It's an amazing transformation over such a short period of time.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.