Retail traders make up nearly 25pc of the stock market following COVID-driven volatility, Citadel says

Retail investors now count for roughly 20 per cent of stock market activity on average and nearly one-quarter of trades on peak days, Joe Mecane, head of execution services at Citadel Securities, said Thursday.

By contrast, individual investors made up just 10 per cent of the market’s trades in 2019.

That share then crept to 15 per cent as popular brokerages including E*Trade, TDAmeritrade, and Charles Schwab erased their commission fees and lowered the barrier to entry for casual traders.

The percentage is climbing even higher on the back of coronavirus-related volatility, Mecane said in an interview on Bloomberg TV.

The Federal Reserve’s unprecedented March 23 policy announcement set a backstop for risk markets and prompted an influx of profit-hungry retail investors.

Yet even as the rally has slowed, those traders are “becoming a more significant liquidity source in the marketplace”, Mecane added.

Much of the new trading activity is concentrated in options contracts. The derivatives allow investors to leverage long and short positions in the stock market, adding volatility to an already choppy environment.

The growing proportion of options trades reflects both an increase in retail investors’ knowledge and access to complex investment products, Mecane said.

“We do see expansion of their participation in different option instruments. Historically its been more of a single leg focus on products,” he said. “We’ve seen them get more into index products. We’ve seen them expand into more complex order types.”

Wall Street veterans not happy

Not all of Wall Street is welcoming the growing demographic. Industry veterans have referred to the movement as muddying a market that valued discipline over speculation.

Such a narrative ignores the simple fact that retail investors aren’t driving the entire market, Mecane said.

Casual traders are benefiting from the market more than they did during the last downturn, when commission trades and account minimums ate into potential gains.

While the group’s participation is growing, it isn’t yet throwing the market off its axis, the executions head added.

“Certainly retail investors have a different investment horizon and a different profile to their orders, but ultimately the market is going to price in all the information that it has at that point in time,” Mecane said.

“Retail is clearly a significant force but they’re not going to be the ones that are solely able to drive valuation or market levels.”

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