The mood has shifted dramatically a year since a spectacular rally in shares of GameStop captivated Wall Street, launching a mania for so-called meme stocks and putting the spotlight on retail investors as a force to be reckoned with in markets.

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GameStop shares have tumbled from their peak, though they are far above levels touched before the meme stock craze. Other stocks popular with retail investors, including AMC Entertainment Holdings, have followed a similar path.

It's not only meme stocks that have lost their luster. Individual investors and professional money managers alike now have to contend with a hawkish Federal Reserve, with expectations of tighter monetary policy battering assets that soared over the last two years and stirring volatility in broader markets.

Despite sharp drops from their 2021 peaks, several of the stocks caught up in the meme-stock trading frenzy are trading higher than they were at the start of 2021. AMC and GameStop remain up about 600% and 400%, respectively, from their December 31, 2020 closing levels. Some, like BlackBerry show a more modest gain of 14%.

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Others haven't fared as well. Clover Health, for instance, which at one point in 2021 was up 72% for the year, is now trading 86% below its 2021 starting level.

In many cases, those who arrived at the meme stock party early and were quick to take profits were rewarded, while late-comers were punished. Most of the stocks swept up in the 2021 trading frenzy now stand anywhere between 70% to 95% below their recent highs.

Options have been a popular tool for investors looking to play the rally and their heavy usage helped exacerbate the swings in some stocks.

Heightening their appeal among individual investors was the growth of commissions-free options trading on platforms such as RobinHood and Webull.

Single stock options have been especially popular. Trading in these contracts on individual stocks jumped to a record high, at one point making up as much as 70% of the overall volume in options markets.

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Single stock options' overall market share has fallen to about 60% but remains higher than pre-2021 levels, suggesting that interest in options plays among retail investors remains robust.

A year ago, retail investors rallied to squeeze hedge funds that had bet against shares of GameStop and other companies, bruising institutional players such as Melvin Capital in the process.

But while the surges in GameStop and other meme stocks made some bears skittish, the practice of shorting stocks – or selling borrowed shares in the hopes of buying them back at a cheaper price – remains a popular strategy in markets.

"Short interest in some stocks has decreased rapidly as short-sellers exit positions to ensure that they are not caught out in the next GameStop event," said Peter Hillerberg, co-founder of financial analytics firm Ortex.

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"However ... this does not seem to have resulted in a significant effect as the overall short interest in all US-listed stocks is currently 30% higher than it was a year ago, demonstrating the willingness to short stocks is still high," he said.

Reddit's WallStreetBets, the forum where individual investors exhorted each other to defy hedge funds and coordinated their stock buying, saw its membership swell in the wake of last year's meme stock drama, though engagement remains well below the peaks of early 2021.

The forum boasts around 11.5 million subscribers, up from 1.7 million in December 2020, while daily posts have fallen to under 1,000 from a high of about 64,000 a year ago.

That doesn't mean that retail investors have dropped out of the market, even as volatility has rocked asset prices.

Individual investors bought a net of $1.66 billion in equities on Wednesday, when a hawkish US Federal Reserve outcome caused wild gyrations in markets, data from Vanda showed. That was the highest figure since a net $2.2 billion bought on November 30.

First Published:Jan 28, 2022 3:57 PM IST