By Phil Mackintosh, Chief Economist, Nasdaq
Trading in U.S. stocks has increased over the past two years, with volumes now consistently above 10 billion shares a day. Data shows that retail has become a more significant participant in the market (especially for some stocks).
But has retail been buying or selling this whole time?
Using sub-decimal trades, we can estimate what retail is doing
In recent weeks we’ve discussed how a lot of retail trades that are crossing the spread are often filled at sub-decimal prices. Given that off-exchange market makers most likely need to capture some spread, it’s possible to estimate when those trades were likely retail buyers or sellers. Although, it’s worth noting that this approach misses retail orders that rest on exchanges as well as orders filled off-exchange at decimal prices.
Looking at what Nasdaq’s Retail Activity Tracker shows
In today’s analysis, we use data from Nasdaq Data Link called U.S. Retail Equity Flows (UREF). It uses a proprietary methodology to capture 45% of retail flow on a stock-by-stock basis.
For those that don’t want to crunch all the data themselves, we highlight a new data product based on UREF that Nasdaq Data Link recently launched, called Retail Trading Activity Tracker (RTAT), which uses SIP end-of-day data for its calculations. That summarizes the underlying information in order to highlight key retail trading activity and trends for all investors.
Gross trading doubled during Covid
Looking at the gross levels of trading in the UREF retail data, we see that activity started to rise as early as December 2019, when most retail brokers reduced commissions to zero (green area in Chart 1).
When Covid hit in March 2020, activity increased more quickly, rising from around $18 billion per day to around $32 billion per day —almost double the pre-2020 levels.
The data also shows two notable periods where trading held above $40 billion per day – one in April 2020 and another in January 2021. Many link those spikes to retail investing their Covid stimulus checks. However, despite the size of the stimulus and the increases in personal savings they caused, the spikes in retail trading don’t actually line up as well as you might have expected (grey lines in Chart 1). In fact, most of the first spike occurred before the first stimulus check. Similarly, the third stimulus check happened when retail trading was already declining.
Notably, even with stimulus and pandemic unemployment benefits now history, and unemployment back to 4.6%, retail activity remains strong, holding around $30 billion per day.
Chart 1: Gross levels of activity in UREF retail data
Looking at the trends in shares traded (blue line) shows a more nuanced story. Retail volume still doubled—increasing from around 490 million shares per day to over 970 million shares per day. However, trading volumes increased more rapidly as soon as Covid lockdowns started.
It’s also worth noting that the proportional increase in volumes is larger than the increase in value, although that’s expected, considering retail tend to trade relatively more in low-priced stocks.
Shares-traded data also shows the impact of meme stock trading in 2021. Retail share volume data more than doubled again, to almost 3 billion shares per day, in January, when GameStop was most active. A second, smaller spike is also visible in June when AMC was most active.
Are retail investors net buyers or net sellers?
The data shows that, on a weekly basis, retail is almost always buyers (green bars in Chart 2).
However, we highlight market sell-offs (grey zones, where the purple line dips), where it’s quite clear that retail also buys less in those weeks.
It also seems from this data that retail were net sellers during the Covid sell-off – at least with the ~45% of retail trading that this data captures. However, even the largest week of net selling, at $7 billion, is small in comparison to the almost $1 trillion that traded each day during those weeks.
Chart 2: Weekly net purchasing (vs. S&P 500 index levels)
This data in Chart 2 also seems to show that retail became a greater net buyer as the Covid recovery progressed. In fact, the data indicates retail bought around $1 billion per week in 2020, rising to over $3 billion per week in 2021.
Although that helps explain some of the strength in the market, we would highlight that the overall market is trading closer to $550 billion per day, making retail net buying a fraction of total liquidity.
ETFs benefit from consistent retail buying
UREF data can also be calculated separately for each ticker. That allows us to follow the same trends for separate stocks or groups of stocks.
In Chart 3 below, we see that ETFs (yellow line) have very consistent net buying, dipping negative only for the middle of the Covid sell-off in March 2020. The data also shows retail buying of ETFs increased in stages, from around $700 million per week in 2019 to $2 billion per week in 2021.
In contrast, single stock trading is far less predictable (light blue line), seeing much larger selling than ETFs during the Covid sell-off, totaling over $11 billion in two weeks, as well as a number of weeks of $1 billion out-flows since Covid. Even the best weeks for stock inflows are usually only in line with ETF buying.
It’s also interesting to look at the subset of core meme stocks (GME, AMC, BBBY), especially given what we know about volumes from Chart 1, as well as how much prices in those stocks rallied. The UREF data indicated consistent buying week after week, which peaked at around $600 million per week but has since faded to around zero.
Chart 3: Weekly trends in retail flows for ETFs, stocks and meme stocks
We can, of course, add all of these flows together over time.
That shows that retail have been consistent net buyers of stocks and ETFs, adding to inflows of almost $300 billion since January 2019, with just a “hiccup” caused by the Covid sell-off. That supports other data that shows more new investors are starting to invest in stocks. Over the long term, that’s good for household balance sheets.
Chart 4: Cumulative data shows ETFs receive almost two-thirds of all net new investments
Why is this important?
A lot of data indicates that retail has become a larger source of capital for companies and is providing additional liquidity to markets. The UREF data confirms that’s mostly true.
Understanding what impact retail has on trading and market valuations and liquidity is also important for other larger investors.
This data also shows that, over the past nearly three years, retail has consistently been adding to their investments, with just a small exception as companies furloughed workers as covid forced quarantines. In fact, on average retail investors invest around $100 billion in the market each year, with the majority going to ETFs.
Robert Jankiewicz, Research Specialist for Economic and Statistical Research at Nasdaq, contributed to this article.