Are Traditional Investment Strategies Still Viable in The Era of Day Trading?

The GameStop debacle illustrated an underling trend that will greatly concern both discretionary and systemic hedge funds: day trading has grown in popularity to the extent that a swarm of retail investors have been able to exercise an alarming amount of influence on even large cap companies.

Many herald this moment as a ‘democratisation’ of the markets, with some claiming that recent events herald a financial revolution of sorts. The investment firm Melvin Capital lost over 30% of assets due to short squeeze brought on by this sudden flood of capital caused Ken Griffin’s Citadel and Steve Cohen’s Point72 hedge funds to inject $2.75 billion of emergency capital.

To claim that such blatant speculation will end well for anyone would be ludicrous. The average retail investor has underperformed the S&P 500 for the last 25 years, with over 90% of retail investors losing money. This financial mirage of easy money will only add to the great numbers of lossmaking retail investors. In an attempt to one-up the giants of Wall Street, enormous lasting damage could be done to the global financial system. That does not simply affect those with sprawling assets, it has a sharply negative impact on everybody.

The great economists of the 20th and 21st centuries have divided such speculative events into four stages: displacement, boom, euphoria, and crash. One of the major catalysts for the Wall Street Crash of 1929 was heavy retail trading: on Black Thursday, the market lost 11% of its value on the back of very heavy volume. At one stage volume was as high as 16 million on a single day (source: JK Galbraith’s The Great Crash 1929), compared to 3.5 million just 18 months before.

Bubbles never end well for investors of all kinds. Concrete steps to adequately regulate the speculative market must be taken before history repeats itself yet again. The Covid-19 recession was certainly handled better than the 2008 financial crisis: stimulus measures were effective at stemming the tide of early market losses. However, we must not allow success to breed complacency: if governments fail yet again to tackle market speculation, the losses will be far-reaching and long-lasting.