JUST TWO years ago the future of investing seemed to involve fewer and fewer people. Retail investors were piling into “passive” index funds, which track a broad basket of stocks for a tiny fee. Active fund managers, whether swaggering hedge-fund gurus or staid mutual-fund bosses, were in retreat as index and quantitative funds swelled. More automation seemed inevitable. A future in which human investors vanished altogether, replaced by slick, powerful machines swapping shares at near-lightspeed seemed just around the corner.
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That is not quite how things have turned out. A mass of active retail traders have been romping around the American stockmarket for more than a year. They piled into short-dated derivative bets on Tesla, an electric-vehicle maker, and bid up shares in Hertz, a car-rental firm, after it went bankrupt. Early this year came their pièce de résistance: a frantic rally in the shares of GameStop, a video-game retailer, which rose by 2,000% in a little over two weeks. So volatile was the share price and so large the flows that the stock-settlement system nearly broke.
The proximate causes for the retail renaissance are hard to disentangle. Lockdown-induced boredom and stimulus cheques are often cited as fuel for the active retail investor. But the pandemic swiftly followed a price war in October 2019, when America’s largest brokers all cut commissions to zero, copying Robinhood, a digital upstart. And retail access to sophisticated trading tools, such as leverage and derivatives, has long been growing. Between October 2019 and February 2020 trading volumes at retail brokers almost doubled from a low level, before doubling again once lockdowns began.
Almost two years on from the price war it is clearly much more fashionable to be obsessed by the stockmarket and hang out on Reddit swapping tips than it is to be coolly indifferent. But how big has the shift towards active retail trading really been? Is passive now passé?
These questions can be answered in three ways. The first is by examining the number of retail traders. In 2019 around 59m Americans had accounts with one of seven of the largest brokers. This number has surged since to 95m, as 17m new accounts were opened in 2020 and 20m were set up this year.
Next, consider trading flows. These suggest an almighty spike. Retail trading went from around a quarter of volumes to a third in early 2020 and peaked at over 40% in the first quarter of 2021 (once marketmakers, who stand in the middle of every trade, are excluded). The plurality of trading activity now comes from retail punters, not institutions, quants or banks.
Third, look at asset holdings. According to Goldman Sachs, a bank, the share of American stocks held directly by households has been falling for decades as investing has become dominated by professionals. In the 1970s and 1980s pension funds rose to prominence, before active mutual funds gained market share in the 1990s and 2000s. Over the past decade passive funds have gobbled up assets. But the share held by households directly began to stabilise around 2015 and is climbing again: between the end of 2019 and March 2021 the share of stocks held by households climbed from 36% to 38%.
All this makes the active retail surge seem vast. But two things should give you pause. First, the rise of the active retail investor has not derailed growth in passive ones. Though the total slice of equities passively tracking an index is hard to measure, the share of the S&P 500 held in exchange-traded and mutual index funds has risen by around 0.5 percentage points since 2019, to 18.3%. That is slower than in preceding years, but still a relentless march upwards.
Furthermore, not everyone who has opened a brokerage account since 2019 is a day-trader. On average the 32m account holders at Charles Schwab (which recently merged with TD Ameritrade) trade around four times a month. This is more active than Vanguard customers, who seem positively idle (three-quarters of them do not trade at all in a year) but leisurely compared with the 34 or so trades that the 1.5m customers of Interactive Brokers, another retail broker, make every month.
Active retail traders, then, are clearly a force to be reckoned with. And if their ascent was prompted by the structural changes to access to trading rather than a passing pandemic fad, then they will remain so. Yet it is worth remembering that most retail investors still trade at a sedate pace.
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This article appeared in the Finance & economics section of the print edition under the headline "Jacks are all traders"
August 19th 2021
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