A year after GameStop, Wall Street is still scared of the power of retail traders — and is tracking them closely

• Wall Street is still wary of the power of retail traders a year after the GameStop frenzy.
• Investors are following Twitter and Reddit sentiment in an effort to stay ahead of the curve.
• Trading desks inside top banks such as UBS are also keeping tabs on retail investors' activities.

Almost a year ago, traders up and down Wall Street couldn't believe what they were seeing. The prices of seemingly random unloved stocks were soaring by hundreds of percent, for no good reason.

It soon became apparent that retail traders — that is, amateur investors — organizing themselves on the WallStreetBets Reddit forum were behind the huge run-ups. They were gunning for hedge funds that had been wagering against the down-on-their-luck companies, which became known as meme stocks.

Video-game store GameStop was at the center of the storm, and its stock rocketed close to 2,000% in a matter of days. It was a disaster for investors betting on a sharp fall in the stock, who quickly racked up losses of around $20 billion. Gabe Plotkin's Melvin Capital hedge fund hasn't recovered since, and it was down 42% in 2021, according to Bloomberg.

A year later, Wall Street remains wary of the power of retail traders, who can shift markets in a moment. But it's adapted to the new world, and many pro traders are even copying amateur investors' moves.

"When the GameStop rally occurred, and hedge funds lost $20 billion, I think it switched the light on among hedge funds, discretionary managers and professional investors that the power base can shift very quickly," Marina Goche, CEO of data company Sentifi, told Insider.

Sentifi has just signed a deal to provide "alternative data" to top financial analytics company Morningstar. The company keeps track of hundreds of millions of messages across social media websites like Twitter and Reddit. It's looking for shifts in chatter that can help predict which companies or assets are about to soar or plummet.

After GameStop, many pro investors look to Sentifi's data to help manage the risk that their investments are about to fall foul of a retail trading frenzy, Goche said. Hedge funds in particular have been getting in touch.

Big players are getting in on the game

Yet major players aren't just looking to defend themselves. They also see a chance to make money.

At UBS, analysts have been monitoring retail trading activity, and in-house traders have been acting on the information. The investment bank directly tracks retail flows and volumes, analyzes options activity, and follows social-media sentiment to work out what the amateurs are up to.

"Investors should be paying attention to where that [retail] involvement has had some of the more outsized impacts," Keith Parker, head of US equity strategy at UBS, told Insider.

"For the most part, retail doesn't impact or traffic in tons of stocks. But the ones that they do, they tend to have pretty outsized influence. And so it does matter at the extremes."

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Goche said Sentifi's customers are interested in harnessing retail-trading momentum. She said Sentifi quickly picked up on Reddit interest in silver in 2021, and that clients jumped in to get ahead of the moves.

However, although there were some murmurs throughout 2021, retail traders currently seem unlikely to latch onto another GameStop, AMC or Bed Bath & Beyond.

Along with much of the rest of the market, retail investors were pivoting away from more volatile growth companies — think Tesla and Nvidia — toward so-called value stocks towards the end of last year, Parker and his team at UBS found.

But Parker said Wall Street shouldn't expect the retail-trading phenomenon to die down any time soon, and suggested more surprises could be on the way. "It's important to track, [but] pretty difficult to predict," he said.