Retail investors are more powerful than ever across markets. This changes the way institutional and retail investors alike use data to inform their investment strategies.
This article explores how fundamental, technical, macro, and alternative data – many of which are available on IEX Cloud – have become important to navigating the changing market landscape.
The Rise of Retail
Since the start of 2021, the “rise of retail investors” has been one of the most prevalent narratives driving financial markets, particularly equity markets. Retail trading now accounts for more than 10% of daily market volume, spiking at over 25% of shares traded in several months in 2020 and 2021. Not to mention, retail investors now account for a majority of shares held in certain stocks, like GME or AMC.
Perhaps the clearest sign indicating the growth of retail investing in recent years is the IPO of retail trading platform Robinhood (HOOD) and its ~$35B market cap for providing no-fee trading. Robinhood has been widely credited, or blamed depending on your perspective, for driving short squeezes in so-called “meme stocks.”
This growth in retail investing has a wide-ranging impact. Institutional investors are now forced to account for the behavior of retail investors as they make asset allocation decisions. This has driven many institutional investors away from heavily shorted stocks – with many more now hesitant to invest in thinly traded stocks where a small number of retail traders can influence volatility.
Moreover, issuers and their public facing Investor Relations Officers (IROs) must now account for retail investors, in addition to traditional institutional shareholders.
These trends in retail investing change the way the industry uses and relies on data.
Implications for Investors
The collective action of retail traders coordinating on Reddit and other social media platforms changed the data that institutional investors must rely upon when making investment decisions. In other words, we’ve seen an evolution in the type of financial datasets used to gain the clearest picture of the market. Many investors are now adopting nuanced foundational data that cross-cuts fundamentals and technical indicators, as well as macroeconomic data and a wide variety of alternative data.
In advising 20+ fintech companies and numerous buyside and corporate clients, I have heard a consistent message from dozens of institutional investors and IROs indicating that shifting market dynamics have dramatically impacted their process. The datasets below are among the most mentioned as increasingly critical to their strategy.
Many institutional investors increasingly draw insights from fundamental ownership and volume data. These investors often also utilize complementary technical data as a filter, while also tracking short interest.
- Fund Ownership and Institutional Ownership help investors estimate the likelihood of retail investors materially moving a stock price, since these datasets help illustrate where ownership lies.
- Volume by Venue helps institutional investors see if retail investors are piling into or out of a particular security.
- Technical Indicators serve as an increasingly important filter for investors to understand price inflection points and how susceptible certain assets may be to outsized price moves.
- Short Interest has become an essential filter for nearly all institutional investors – the industry has seen retail investors coordinate short squeezes on numerous occasions, which poses a new risk to traditional long/short strategies.
Coupled with COVID-induced economic uncertainty, the rise of retail investors has also prompted many institutional investors to more closely track macroeconomic datasets. These datasets help provide a top-down gauge of economic health, which can be a leading indicator of market volatility.
The macro datasets that have come into particular focus since the start of COVID-induced volatility have been:
- Consumer Price Index: Provides insight into inflation, which has become increasingly important given the pandemic’s impact on supply chains.
- Industrial Production: Indicates if economic growth is accelerating/decelerating, which can provide clues about potential regional and sector variation in financial performance.
- Initial Jobless Claims: Serves as a leading indicator of labor market health by showing how many people are newly out of work.
- Total Payrolls: Provides a real-time indicator of labor market health by suggesting how many people are presently employed.
- Unemployment Rate: Acts as a lagging indicator of labor market health by indicating how many people have lost their job recently.
In combination with these macro datasets, alternative data can help provide even further insight into the market and its many facets.
Two of the most widely used and well-known alternative datasets are web traffic on specific websites and/or foot traffic in specific geographic areas – these help investors understand consumer behavior.
However, many of the top hedge funds that I spoke with have found these traffic figures to be an imprecise indicator of economic behavior and have increasingly focused on more specific datasets such as the following:
- Credit Card Swipe Data is a more concrete version of web/foot traffic data that indicates actual spending patterns. Earnest Research is one of the leading providers of this data.
- Hiring Data provides leading indicators of labor market health and company health. COVID-induced lockdowns created turmoil in the labor market, pushing many investors to look for refined figures on company health and growth. Hiring data provided by LinkUp has become a vital resource as investors attempt to estimate reopening of certain segments of the economy. Investors also might use employee headcounts for specific companies to assess their output potential and growth trajectories – this data is available on IEX Cloud.
- Geopolitical Data has been vital in helping institutional investors navigate differential political responses to the global health crisis, as well as other geopolitical risks. A leading provider of this type of detailed geopolitical and macroeconomic data is GeoQuant.
- KPI Data provides investors with more micro level analysis of company financials in the form of company-specific Key Performance Indicators (KPIs). Granular KPI data is provided by EventVestor.
- Earnings Distortion Data provides investors with a short-term prediction of a company’s likelihood of missing earnings expectations in the next quarter. This metric was developed by New Constructs, and is also integrated into its research report that is available through IEX Cloud.
- Social Media Tracking has become particularly popular as a result of meme stock chatter. Quiver Quant directly maps what retail investors are saying on Reddit in an attempt to predict which securities are likely to be the next “meme stocks.”
While certain alternative datasets can be cost-prohibitive for retail investors, institutional investors certainly aren’t the only ones that can draw insight from alternative data. As retail investors become more sophisticated and data becomes more widely available, so does their propensity to leverage the same datasets as institutional investors.
Implications for Issuers
Issuers are increasingly consuming financial data to arm themselves with the same knowledge as their company’s investors. This new, data-driven IR strategy has pushed many investor relations officers to adopt technology platforms – like Aiera, Sentieo, and Alphasense – to help them access the same data that investors rely on and use. This includes fundamental and macro data, and more recently, alternative data as well.
While retail investors have historically been seen as a fragmented and hard-to-service group for issuers, that dynamic too has started to change. Now that retail investors have demonstrated their capability to act as a collective group – as well as dominate shareholder percentages – IROs have started to focus more attention on attracting this group of investors.
A Shifting Playing Field
The growth of retail investing has changed market dynamics for institutional investors, forcing them to adopt new data inputs and adjust their market behavior. Retail investors have already started to react to these adjustments by becoming increasingly data savvy themselves.
In short, data is the equalizer, levelling the playing field to help all parties understand the shifting investment landscape. As for the future – there’s a good chance this trend will only continue as investors, and issuers, seek ever more granular data to better understand market dynamics.
How to Get This Data from IEX Cloud
Many of the fundamental and macro-economic datasets listed above are available directly though the IEX Cloud API.
Here’s how to get started:
- Log into your IEX Cloud account or sign up for IEX Cloud – you can start for free to access a small amount of basic data or get full access to the platform with a paid plan for as little as $9 per month.
- Go to the IEX Cloud Console to find your API token. If you're not familiar with how to make an API request, you can also use this guide.
- Start accessing data. Click the links above under “Foundational Data” and “Macro Data” data – this will take you to our API documentation, where we’re walk you through how to pull that dataset from our API.
If you have questions, don’t hesitate to reach out to the IEX Cloud team at firstname.lastname@example.org.
Evan A. Schnidman, Ph.D. is the founder and Managing Partner of EAS Innovation Consulting and was previously the founder and CEO of Prattle, as well as the Head of Data Innovation at Liquidnet.
Disclaimers: This content is not investment advice. Any views or opinions expressed in this blog do not represent the opinions of IEX Cloud or IEX Group.
IEX Cloud Services LLC makes no promises or guarantees herein regarding results from particular products and services, and neither the information, nor any opinion expressed here, constitutes a solicitation or offer to buy or sell any securities or provide any investment advice or service.
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