The world of retail investing has changed dramatically in the last year. From commission-free trading and consolidation to market crashes and online message boards, retail investors today inhabit a brave new world.
In the space of seven days in October 2019, TD Ameritrade, E*Trade, Charles Schwab and Fidelity all announced that they were removing commissions on stock and ETF trading – following the lead of Robinhood, which has been allowing its users to trade commission-free for many years. The following month, Charles Schwab announced its plans to acquire TD Ameritrade for $26 bn. Then in February 2020 Morgan Stanley said it had struck a deal to acquire E*Trade for $13 bn, a deal recently approved by shareholders.
As the Covid-19 outbreak sped up, global stocks experienced an average drop of 25 percent in March, according to data from Goldman Sachs. Shelter-in-place measures were enforced, unemployment levels skyrocketed and institutional investors set new records for the amount of cash they had on hand, according to Bank of America Merrill Lynch’s fund manager survey.
In the space of six months, barriers to entry for retail investors fell, the cost of trading disappeared and millions of people were forced to sit at home, unemployed or furloughed. According to TD Ameritrade, 608,000 retail investors opened new accounts in the quarter ending March 31; two thirds of those accounts opened in March.
Charles Schwab reported 609,000 new accounts in the same quarter, while E*Trade said 90 percent of its 363,000 new accounts were from retail investors. And Robinhood trumped all competition, recording 3 mn new accounts in the first three months of 2020. The pattern is mirrored in other parts of the world, too: UK-based Freetrade reports a 90 percent increase in new accounts since March and Australian platform Stake says new users have doubled.
Many platforms have expanded their product offering in recent years, enabling retail investors to buy into ETFs, participate in options trading and execute more complicated buy and sell actions. With these more complex investing tools at their fingertips, retail investors account for 20 percent-25 percent of daily market activity, according to Citadel Securities – at least double their activity in 2019.
This is enough to concern SEC chair Jay Clayton. ‘We’re seeing significant inflows from retail investors who conduct more trading than investing,’ he told CNBC in late July. ‘I encourage people to educate themselves, but short-term trading is more risky than long-term investing and I do worry about the risks investors take.’
Clayton was speaking a month after Alexander Kearns, a 20-year-old student, committed suicide when the Robinhood app showed he had a negative balance of $730,000. Kearns was trading options and was reportedly misled by the app displaying only half the trade, due to a lag in its processing of the deal. The co-founders of Robinhood wrote on the company’s blog that they were ‘personally devastated’ and committed to a series of changes in the app in recognition of their ‘profound responsibility’.
Robert Jackson, who left his post as an SEC commissioner in February 2020 to return to NYU Law School, shares Clayton’s concerns. ‘I would love for people to feel about the market the way my parents felt when they invested years ago in a way that enabled me to go to college,’ he said during remarks at a Berkeley Law School event in June.
‘The [perception] that the markets are a casino or a game… worries me about the long-term future of young people in particular.’
But does any of this change the nature of IR? Significant retail trading can have an effect on volatility, certainly, but for most public companies, retail shareholders represent a small percentage of the investor base – and a remote, disparate community to communicate with.
This is an extract from an article that appeared in the Fall 2020 issue of IR Magazine. To continue reading, click here to open the full digital edition of IR Magazine