Retail Trading: Down From Peak, But Still Strong

Retail trading is down from peak numbers reached during the height of the COVID-19 pandemic, but it’s holding well above pre-pandemic levels, and indications are that current levels are sustainable.   

That was the consensus of the “How Retail is Changing Equity Market Structure” panel at the Security Traders Association of New York annual conference, held Monday at the New York Stock Exchange in lower Manhattan.

Retail comprises about 18% of overall trading activity currently, compared with 13% pre-pandemic and 27% at times in 2020 and early 2021, according to Jim Swartwout, President and COO at Robinhood.

While retail account openings have slowed, trading activity is still strong from many newer retail traders.  

“The ones who came on during the pandemic because they were bored, they fell off. But the others have stayed in,” said Anthony Denier, CEO of Webull.

Rather than just battling each other for market share on a zero-sum basis, retail brokerage firms have expanded the pie over the past five years by transforming the user experience to make trading “not something your grandfather did,” Denier said.  

“We do have a new normal, even if it’s not at the highest levels,” said Chuck Mack, Head of US Equities at Nasdaq. Mack noted signs of retail investors are becoming more sophisticated, such as increasing their trading of ETFs rather than just individual stocks.  

The panel also discussed the dichotomy between how some media and regulators negatively characterize retail traders’ chances of getting a fair shake in the market, and the reality that retail traders have never had it better in terms of user experience and cost.

Panelists said that payment for order flow, the controversial practice of brokerage firms receiving payment to route orders to be executed elsewhere, is an example of how common perception – that it is a rip-off for retail traders — diverges from the reality that PFOF effectively subsidizes retail traders’ experience and boosts customer satisfaction.  

“The facts don’t match up with the narrative,” Swartwout said. “Customers love new products and functionality, and they don’t care how we pay for it.”

“The equity market is the number-one wealth generator for most Americans, and PFOF enables this,” Denier said.

Broadly speaking, U.S. equity markets are the envy of the world, and while they are not perfect, there is no need for wholesale changes, panelists said.  

Rather than taking a dramatic step such as banning PFOF, regulators should instead target disclosure and transparency. Nasdas’s Mack emphasized the need for better and more useful disclosure, rather than just more disclosure. 

“It’s important that we should continue to improve market structure over time,” Mack said, adding that’s a primary way to build retail investor’s trust and confidence.