Financial literacy or luck? Small-time traders made big impact in 2021

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FILE – A sign for Wall Street hangs in front of the New York Stock Exchange, July 8, 2021. Stocks are opening with slight gains on Wall Street Thursday, Dec. 30, keeping the S&P 500 and the Dow Jones Industrial Average hovering just above the latest record highs they set a day earlier. (AP Photo/Mark Lennihan, file)

LONDON/NEW YORK — In May, San Diego-based Emily was feeling flush from a year of double-digit stock-trading gains. She decided equity options, which some fellow stay-at-home investors were dabbling in, would juice up her returns.

Emily was among the army of small-time investors who shook up stock markets in 2021. Some earned fortunes by squeezing out hedge funds from short positions on so-called “meme” stocks such as retailer GameStop and cinema operator AMC Entertainment.

AMC proved to be Emily’s downfall. As its shares hovered around $15, she began selling “naked call options” that allowed holders to buy underlying stock from her at a pre-agreed price. Instead of falling, AMC stock rocketed.

Naked options meant Emily did not actually own the shares. When AMC shares hit $72.62 on June 2, she faced margin calls, which required her to add cash to her brokerage account.

“I was on the phone with (brokerage) TD Ameritrade’s margin team, telling them to give me more time … but it was either I sell it or they sell it,” she said. She said she liquidated her portfolio, losing $670,000.

Emily is not the trader’s real name but she provided documents confirming her identity. Reuters could not independently verify the size of her losses but reviewed brokerage statements showing she sold sizeable call options on AMC and other stocks in May.

“It was very devastating. I couldn’t sleep,” Emily said. Having quit her human resources job at the end of 2019 to trade full time, she now works as a delivery driver.

Her account is a cautionary tale of what can happen when booming markets tempt inexperienced investors to risk it all.

For every Emily, there is a small-time trader who surfed this year’s stock market boom, energized by economic recovery, central bank money-printing and government cash handouts.

TD Ameritrade, the broker Emily used, and Schwab added a combined six million new accounts this year.

Conditions were ripe for retail trading even pre-pandemic, as new mobile platforms enabled individuals to buy shares, or fractions of shares, with no commissions.

“Everyone can get their bit of the pie,” said Ben Phillips, a 30-year old London-based pilot who started trading in 2019. He calls himself a long-term investor, but also day trades “as a bit of fun, a bit of gambling.”

The retail wave was the “main reason” global equity demand reached $1.1 trillion this year, JPMorgan strategist Nikolaos Panigirtzoglou said.

“By acting as momentum traders, retail investors will most likely continue to propagate the equity markets, at least for the coming year. They will have no alternatives because interest rates will stay near 0%,” he added.

Retail trading, unlike meme crazes, seems unlikely to fade.

U.S. retail traders have bought a net $281 billion worth of U.S. stocks so far this year, against $240 billion in 2020 and $38 billion in 2019, according to Vanda.

Many new traders waded into equity options, lifting U.S. volumes more than 40%, analytics firm Trade Alert estimates.

Individuals account for up to half the trading in options on individual shares, according to JPMorgan. Those options’ share of total option volumes rose to a record high this year, Reuters’ analysis of Trade Alert data shows.

The retail frenzy is most pronounced in U.S. markets. Platforms popular in Europe say traffic is generally highest in U.S. companies such as Tesla, Nio, Apple, Amazon and GameStop, but the trend is broadening.

Russia’s Moscow Exchange says 26 million retail accounts are registered with it, up fourfold from early 2020, and both the bourse and brokerage Tinkoff plan to expand trading into the weekend.

In India, 19% of trading in November was by mobile phone, one barometer of retail activity, according to Bombay Stock Exchange data, versus 7% in November 2019.

Trading activity growth has slowed, possibly as central banks signal higher interest rates are coming.

Brokerage eToro’s online platform, which has two-thirds of its customers in Europe, saw 106 million trades in the third quarter of 2021, half of the first-quarter total, though well above early-2019 levels of 63 million.

Meager returns elsewhere persuaded Phillips, the pilot, to start trading in late 2019.

While his Tesla holdings were hit hard by the March 2020 sell-off, he bought more after watching YouTube videos where traders advised watchers to “buy the dip.”

The subsequent bounce quadrupled Phillips’ initial 15,000 pound ($20,100) outlay, he said, but he has no plans to sell, citing his “10-year conviction” on Tesla.

Others such as Dan, a 24-year-old student from northern England, caught the trading bug through “boredom” and reading online chatrooms that pumped meme stocks.

Dan, who asked that his full name not be used, said he made four times his 1,000-pound investment in GameStop, though friends who got in late lost money.

He has since quit day trading, calling it “luck,” but invests in stocks via a British savings account. The experience “helped me be more financially literate,” he added.

Emily, the California trader, also still trades but in smaller volumes. She hopes one day to rebuild her portfolio.