The “Retail Trader” has become a story in 2020 with analysts trying to understand their exact impact on the market, and if he or she is the reason behind the elevated volatility and current relatively high valuation. The story originated with online brokers going to $0 commissions in the fall of 2019 and intensified this year, as the pandemic kept people at home with limited outlets for excess energy. The volume of retail trades increased from 137 billion in the 1st quarter to 264 billion in the 2nd quarter – a 93% jump.
The news headlines touting the explosive growth in the Robinhood app illustrate one of the major storylines grabbing attention. Robinhood claimed more than 10 million accounts in December. JPM Securities estimates that number is now around 15 million. Robinhood users trade frequently due to the low cost, free commissions, and ease of trading through the app. Robinhood’s business model partly relies on this active trading, as the company makes money via payment for order flow (payment for routing orders to market makers).
One potential impact has been increased trading volume in low-priced stocks. Shares priced below $5 represented 10-15% of all shares traded from 2012 to 2019 according to NYSE data. During this spring and summer, the share of trading volume attributed to these low-priced stocks jumped to 25%. These low-priced stocks can be speculative plays that are trending on Twitter. Despite filing for bankruptcy in May, Hertz (the car rental company) stock went from under $1 to over $5 during a 3-day period in June, and over 1 million shares traded hands.
These two stories suggest the Retail Trader is having a large impact on the market. There is little question the Retail Trader is impacting trading activity in low-priced securities and other highly speculative plays like Hertz. The impact on the overall market is likely much more muted and not the reason for the sharp bounce back from March lows and the current relatively high valuation of stocks. Despite the growth, retail trades still represent a small part of overall volume. For example, from January to June, the total trading flow from 10 online brokers grew more than 75%, yet still represented only 16% of the total flow. This suggests the bulk of trading is still done by professional investors. These investors are still the ones driving the overall market and bear the responsibility for the elevated volatility and current valuation level.