This unexpected market behavior has sparked claims of a structural change in the functioning of capital markets. However, this situation is not really new: Despite having to concede that the tools, outreach and amplification of the equity rally have structurally changed by the extensive use of social networks and other online platforms, most of the recent equity rally’s characteristics are common in a “late” equity cycle stage. These include a reliance on leveraged investing to quickly multiply gains, signs of market manipulation/fraud starting to appear and, lastly, the Fear of Missing Out (FOMO) effect leading to overtrading. All those signs, and more, can easily be found in a traditional Fisher-Minsky-Kindleberger clock. 

But, why did retailers enter the stage now, in one of the biggest economic crises? Four conditions were decisive for this development:

• Widespread and easy access to options trading, offered by trading apps since 2018.
• The surge in social media usage and proliferation of social media influencers as opinion leaders, creating an informal and ‘new’ way of mobilizing capital (e.g. targeting heavily shorted stocks).
• A significant reduction in transaction costs for derivatives and trades in the small-cap market segment, where they could easily become prohibitive: Transaction fees were cut to almost zero by some trading apps in early 2020 (although retailers are paying a wider bid-ask spread).
• The availability of liquidity with low opportunity costs: The first lockdown sparked an explosion in the saving ratio (in Q2 2020 26% of disposable income, disposable income increased by 13% y/y) amid falling interest on bank accounts and limited spending possibilities.

However, targeting the most shorted stocks through the options market is not typically endogenous to retail investors, requiring a certain degree of financial sophistication. This hints that there are some seasoned professionals trading in this market, perhaps professionals using personal accounts. Indeed, in the recent rally, the market impact was magnified by the accelerated Delta and Gamma options hedging strategies used, a trading trick that hedge funds and large investment institutions have also been using for some time . But we observe a new type of “all-in” retail investor is emerging, one who buys up to his margin limit (i.e. borrows against this wealth to buy more shares) and is thus very different from the traditional type focused on long-term valuation-based investments.