By Alexander Osipovich
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
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
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.
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
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
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., such correlations are weak. With others, such as
Google parent Alphabet Inc., 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.,
electric-truck startup Nikola Corp. and biotech firm Novavax
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
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., 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. have
long complained that too much dark trading harms market
"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. 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
(END) Dow Jones Newswires
August 31, 2020 05:44 ET (09:44 GMT)
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