Robinhood and retail investors are upending the stock market. Here's what 4 Goldman Sachs market chiefs have to say about the phenomenon.

• Retail trading volumes have surged as app-based and commission-free brokerages "democratize" investing for all.
• Goldman Sachs gathered four of its top markets experts to discuss the rise of retail traders and their implications for the market in a podcast on Thursday.
• "For the largest online brokers, the number of daily trades has tripled since 2019", John Marshall, head of derivatives research at Goldman Sachs, said in a podcast this week.
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Retail investors tapping into the market via app-based trading platforms like Robinhood have dominated headlines in recent weeks. The craze has culminated in an epic short-squeeze on a handful of "meme" stocks, including GameStop and AMC Entertainment.

As Reddit-fueled stocks come back down to earth, observers have wondered what the growing pool of retail investors means for stocks, and if the "democratization" of investing is leading to some unsound practices.

In a podcast this week, some of Goldman Sachs' top bankers gave their thoughts on the outsize role retail traders have played in recent market activity and the implications for the future of the stock market.

John Marshall, head of derivatives research for Goldman Sachs Research, on the rise of retail traders:

"For the largest online brokers, the number of daily trades has tripled since 2019. But this has mainly been driven by a small portion of their customer base. These day traders are less than 10% of their customers, but they represent more than half of their trades. And the vast majority of retail brokerage customers still only trade a few times a year.

Retail investors now account for about 20%-25% of the value traded in the market on an average day, up from about 15%-20% a year ago. Now, in this broader perspective, we can see that retail investors are participating in this market rally, and that that level of participation is indeed accelerating."

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Marshall, on recent market performance:

"Over the past year, the equity market has been unusually volatile, and the nature of the pandemic has driven some companies to rapidly expand and others to go bankrupt. The high volatility of the market means that investors that buy and sell at the right time have the potential for unusually large profits and of course unusually large losses.

Now, many investors try to avoid volatility through long-term investing in diversified vehicles like mutual funds and ETFs. But when investors see testimonials of others that have outsized returns, they're attracted to more speculative trading strategies."

Greg Tuorto, portfolio manager, Goldman Sachs Asset Management, on the difference between retail and institutional investors:

"I think that the market has, especially in some of these smaller names, shown its inefficiency. And I think that that's something that we try to take advantage of in fundamental equities, especially on the small-cap side. But I think that for a lot of these retail investors, these smaller investors, I think they're looking at it more along the lines of, you know, kind of a price equivalency, you know, which is a little bit different than what we do.

I think, you know, ours is more focused on kind of the revenue earnings and free cash flow of a company and what we can model out. And I think that, you know, sometimes when we see something that's sort of left for dead, as some of these names have been, you know, we leave it there. We don't pay a lot of attention to it. And I think that for them that was an opportunity. And I think that that opportunity created sort of that heat and noise, the sturm und drang, if you will, that really attracted more and more of them."

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Raj Mahajan, global head of systematic trading, Global Markets Division, on the impact of hedge funds following long-short strategies:

"I'd say last week was historic in that the volume of activity that we saw around short covering was significant. I think the bigger question now relates to the earlier questions about retail. Is if you're a hedge fund and you're engaged in the practice of shorting and that's part of your business model, you're running a long book and a short book and you're relatively balanced, you've had a certain view of how much risk any single-name short position could be.

But what we learned last week is that the risk models didn't contemplate a 10x move in the short against you or a 20x move in the short against you. So I think what, for hedge funds, what this is triggering is, you know, how do I have to evolve my risk models to ensure that the shorts that I'm putting on are in fact I have figured out how bad it can run against me? And that's one of the things that sort of jumps off the page when you start to look at this."

Elizabeth Reed of the Equity Capital Markets syndicate desk in the firm's Investment Banking DivisionOn retail investors in the stock market:

"To put some context around that, January of 2021 was the largest January in history for equity-related capital market offerings. January's global volumes were 129 billion. That's up 150% plus year over year. And within Americas, the region printed $63 billion of issuance.

So while last week's headlines firmly resulted in increased market volatility really measured by the VICs, new issue offerings continue to be met with strong investor demand. This is reflected in the absolute volumes issued, pricing dynamics, and the average after-market performance. The retail investor has been an increasingly important part of the market, specifically in 2020. And we expect them to be very active in 2021."

Tune into the full podcast here.

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