The role of retail investors in the financial markets cannot be understated or underappreciated. In the following Intelligence report, we demonstrate how retail investor activity, sentiment, and attention can be a proxy for institutional investors to gauge future asset prices, stock liquidity, market returns, and market efficiency. The report will also go on to discuss several alternative datasets on retail investors that may be used by readers to create such a leading indicator.

RETAIL INVESTORS: UNINFORMED OR MISINTERPRETED?

They account for over 80% of trading volume in China, have been credited for spearheading the country’s stock market rebound in 2019, are the driving force behind several new-wave assets and sectors (e.g cryptocurrencies and cannabis stocks), and account for over $12 trillion in assets in the US alone. Yet, the narrative surrounding retail investors to this day still includes phrases such as “unsophisticated”, “uninformed”, and “negligible”.

While Neudata consider some of these adjectives to be true – after all, no average retail investor spends $900k per year on alt data in order to be better informed – academic research believes otherwise.

For instance, a five-year study by researchers in 2014 found that retail FX traders outperformed professional FX traders, even after disregarding transaction costs. And in emerging markets, specifically the Stock Exchange of Thailand, retail investors beat institutional investors to be the most significant influencer to the Exchange.