Mom And Pop Investors Have Fallen Back In Love With Stocks

Matty-Sways

Apps with free trading and a resurgent bull market have caused a trading boom reshaping the stock market.

New data show an individual-trading boom in the U.S. stock market.

  • Larry Tabb, head of market-structure research at Bloomberg Intelligence, has reported that trading by individuals accounts has become the largest it has been in the last decade.
  • From January through June, individual investors accounted for 19.5% of the shares traded in the U.S stock market, up from 14.9% last year and nearly double the level from 2010.
  • Joe Mecane, head of execution services at Citadel Securities, an electronic-trading firm that executes orders for such brokerages as Robinhood Markets Inc. and Charles Schwab Corp. says some days this year that volume reached about 25% of market volume.

Mr. Mecane thinks the boom has a lot to do with reduced or free comissions. He drew a parallel with the dot-com boom in the 1990s, when web-based brokers made it easier to trade stocks, just as a bull market was under way.

“It was really the start of a similar trend,” he said. “Back then, technological and business innovation provided the first foray into instant execution and self-directed retail investing.”

The idea that stampedes of investors using the popular apps driving irrational stock moves has been come to know as the Robinhood effect,.

In fact, such activity doesn’t matter much for most stocks, according to Nick Maggiulli, chief operating officer of Ritholtz Wealth Management. But there is evidence of a Robinhood effect in some smaller stocks, he said.

Mr. Maggiulli has studied the relationship between how many Robinhood users own a particular stock and its share price. He found that the hottest stocks on the app, including Apple and Tesla don't have a strong correlations. While others, such as Google parent Alphabet have a negative correlation, meaning that as more Robinhood users buy a stock, its price tends to drop. However, he found there are some stocks with a high correlation between Robinhood popularity and price. In recent months, stocks like Eastman Kodak Co., electric-truck startup Nikola Corp. and biotech firm Novavax.

Unlike the institution-heavy U.S. market, Asian markets lead by trading by individuals see exuberant bull runs followed by spectacular crashes. Individuals often account for more than 80% of volume on the Shanghai Stock Exchange, while on the Korea Exchange’s main Kospi market, nearly 84% of shares traded so far this year were on behalf of individual investors, according to data compiled by Hee-Joon Ahn, a finance professor at Sungkyunkwan University in Seoul.

“Individuals in Asia tend not only to crowd in trading of small stocks but also to be very short-term oriented,” Mr. Ahn said.

Another recent side-effect is that individual-investing boom has led to historically high levels of “dark” trading. (When stocks are bought and sold on opaque private venues, rather than public exchanges because online brokers usually send small investors’ trades to electronic-trading firms that execute the incoming orders.) In July, Rosenblatt Securities reported that 43.2% of U.S. stock-trading volume took place off-exchange, is the highest level since the firm started tracking such data in 2008. Stocks that are popular with small investors, such as United Airlines Holdings Inc. are even more likely to trade in the dark. In July, 62.6% of trading of United shares took place off-exchange.

“It’s always a concern when a large part of trading goes on outside the price-discovery process,” said Justin Schack, a managing director at Rosenblatt.

The three biggest players that contribute to the dark trading are Citadel Securities, Virtu Financial Inc. and Susquehanna International Group LLP. (Combined 69.4 billion shares over the counter in June, more than triple the level from November, according to Bloomberg Intelligence. ) Electronic-trading firms profit from individuals’ trades by collecting a small difference between the buying and selling prices of a stock.

At Virtu, a public;y traded company, net trading income more than tripled to $744 million in the second quarter. (Virtu is up 56% since the start of 2020). While the exact amount of the trading income from individuals is unknown, Chief Executive Douglas Cifu said on an Aug. 7 earnings call that the retail boom had been a big boost to Virtu.

“It certainly is great for our business,” he said.

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