It’s one of the year’s biggest market stories: Mom-and-pop
investors have fallen back in love with stocks, lured by free trading apps, a
resurgent bull market led by technology companies and a pandemic that has left
millions of Americans at home with little to do.
New data show a number of ways in which the
individual-trading boom has reshaped the U.S. stock market. Here are five
takeaways:
Individual stock trading is at a decade high
Trading by individuals accounts for a greater chunk of
market activity than at any time during the past 10 years, according to Larry
Tabb, head of market-structure research at Bloomberg Intelligence.
During the first six months of this year, 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, Mr. Tabb estimates.
His data don’t go back further.
On some days this year, about 25% of market volume has been
individual-investor activity, said 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. SCHW -2.07%
Trading activity among individuals started climbing late
last year, when Schwab and other major brokerages cut stock-trading commissions
to zero. Mr. Mecane 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.”
Small investors are powering big moves in some stocks
It has been called the Robinhood effect, the idea that
stampedes of investors using the popular app are driving irrational stock
moves.
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. If Robinhood
investors were pushing prices up and down, one would expect a high correlation
between those two things.
For some of the hottest stocks on the app, including Apple
Inc. and Tesla Inc., TSLA 12.57% such correlations are weak. With others, such
as Google parent Alphabet Inc., GOOG -0.62% they are negative, meaning that as
more Robinhood users buy a stock, its price tends to drop.
Mr. Maggiulli found there are some stocks, though, with a
high correlation between Robinhood popularity and price—indicating that the
app’s users may indeed be driving their share prices. In recent months, such
stocks have included Eastman Kodak Co., KODK -0.66% electric-truck startup
Nikola NKLA -1.31% Corp. and biotech firm Novavax Inc. NVAX 2.41%
As millions of new traders sign up for the investment app
Robinhood, the company is facing scrutiny for enabling some inexperienced users
to make risky bets. WSJ spoke with a financial education professional and two
Robinhood traders about how the app is shaking up the brokerage industry.
Asia is where individual investors truly dominate
Many Asian stock markets have traditionally been dominated
by individual investors, unlike the institution-heavy U.S. market. In places
such as mainland China, frenzied trading by individuals can create a
casino-like feel, with 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.
There are several reasons why there is so much
individual-stock trading in South Korea. These include an underdeveloped
mutual-fund industry, a tech-savvy population accustomed to trading on
smartphones and price wars by brokers that have led to zero or near-zero
commissions, according to Mr. Ahn.
All that leads to heavy speculation, he added. “Individuals
in Asia tend not only to crowd in trading of small stocks but also to be very
short-term oriented,” Mr. Ahn said.
More of the U.S. stock market is going dark
The individual-investing boom has led to historically high
levels of “dark” trading, in which stocks are bought and sold on opaque private
venues, rather than public exchanges. That is because online brokers typically
funnel small investors’ trades to electronic-trading firms that execute the
incoming orders.
In July, 43.2% of U.S. stock-trading volume took place
off-exchange, according to Rosenblatt Securities, a brokerage firm. That is the
highest level that the firm has recorded since it started tracking such data in
2008.
Stocks that are popular with small investors, such as United
Airlines Holdings Inc., UAL -3.59% are even more likely to trade in the dark.
In July, 62.6% of trading of United shares took place off-exchange, Rosenblatt
data show.
Exchanges such the New York Stock Exchange and Nasdaq Inc.
NDAQ 1.96% have long complained that too much dark trading harms market
transparency.
“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.
Big winners may be electronic traders
The firms that execute individual investors’ orders have
enjoyed surging volumes. The three biggest players in that business—Citadel
Securities, Virtu Financial Inc. VIRT 4.74% and Susquehanna International Group
LLP—traded a combined 69.4 billion shares over the counter in June, more than
triple the level from November, according to Bloomberg Intelligence. The vast
majority of the firms’ over-the-counter trades come from individual investors.
OTC trading is a type of off-exchange trading.
Electronic-trading firms profit from individuals’ trades by
collecting a small difference between the buying and selling prices of a stock.
It’s hard to know how much money they are making, though, because most are
private and don’t report financials.
At Virtu, which is public, net trading income more than
tripled to $744 million in the second quarter. Virtu’s stock is up 56% since
the start of 2020. Although the firm doesn’t say how much of its trading income
comes from individuals, 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.
Write to Alexander Osipovich at alexander.osipovich@dowjones.com
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