By: Michael Kamerman-CEO of Skilling
In a triumph for collective action, sparked by online forums such as Reddit, the GME saga saw retail traders and investors take on Wall Street, and the retail crowd’s influence was far greater than any of us could have expected. Robinhood faced significant risks throughout this saga and appeared “on the side of Wall Street” in light of the trading restrictions they were forced to implement.
However, as headline-generating as it all was, it also highlighted the need to educate the trading masses on more than zero commissions or how to use well-designed trading apps.
Once Robinhood buckled under trading pressure and blocked investors, shares were down 79 percent, leaving many retail investors nursing big losses. The frustration felt by customers, unable to execute their positions, led to public outcry and allegations of market manipulation in the favour of the very Wall Street magnates that Robinhood was marketed as being morally against.
Moreover, by appearing to be working with the Wall Street establishment, rather than working for novice traders as they purport to serve, Robinhood appeared to undermine their business model and reputation.
While the event left analysts divided, undoubtedly the movement highlighted that looking ahead, investor education covering numerous topics, requires vast improvement and attention. The onus is now on brokers to respond accordingly, through the employment of clear and consistent customer communication. Without it, the underlying forces of the market might mean next time a Reddit rebellion comes around, it will not play in favour of the retail investor in the same way.
Risks for the brokers
For those with industry experience, the decision of Robinhood to limit the positions of its customers made sense. Too many customers stockpiling into trades, all in one direction, can prove very dangerous to the brokerage and its traders.
Those who have been account holders with brokerages will relate to the frustration of having orders rejected or slipped to unfavourable prices. Faced with the frustration of being told your position is unable to execute, it is natural to look for someone to blame in that situation. However, Robinhood’s plight was not being able to find common ground on that topic with its customers and consequently, leaving the brokerage with a black eye.
Lessons for the traders
Whilst years ago, stock trading was a time- consuming process that required a real human broker, now, thanks to mobile investment apps, we are witnessing a new age of retail trading. However, the ease and accessibility of these apps should not distract from understanding the decisions you make on them. We witnessed this with Robinhood when customers felt frustrated by having orders rejected or slipped to unfavourable prices.
Therefore, one of the key lessons that traders should take from the GME saga is the importance of research. Day trading is not a strategy people can jump into without doing their research first. When deciding where to invest, a company’s stock price is only one part of the equation. In the case of GME, the price did not match the company’s overall financial situation, demonstrated by its plans to close 1,000 stores by the end of the year.
Ultimately, investors need to look at the big picture. When a company is consistently struggling financially and suddenly, its stock price surges, that is a red flag.
New era of retail trading?
Mishaps in communication and perception can sting for a long time. Undoubtedly, Robinhood now faces a healthy share of ‘detractors’ offering warning messages to would-be account holders when they seek advice online. Whilst those who went through the GME saga as traders will likely tell their tales for years to come.
As a result, this has acted as a prime case study around marketing messaging and crisis communication. For Skilling who watched the Robinhood reaction with curiosity, it prompted us to carefully consider our stance and how we educate and communicate with our customer base.
Overall, whilst opinion may be divided following the GME saga, the reputation of retail trading has in fact improved. If we are discussing equities, their volumes have grown in significance. Today they are a major percentage of the overall daily volume and retail traders now have a seat at the table. Moreover, with social media chat rooms resembling the squawk boxes on fast-paced trading floors, this new generation of retail traders will undoubtedly continue to gain influence over the stock market.