Trader Talk

Trading volume for electronic brokers doubled last quarter and shows no signs of letting up

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Retail investors have doubled their trading activity during the pandemic, thanks partly to $0 commissions.

But there are more things occurring to encourage retail trading, including stay-at-home orders and market volatility. Add it all up and you get electronic brokers reporting trading volumes that are up 100% year over year.

In the first quarter alone, daily average revenue trades, a standard industry metric, have doubled for most of the e-brokers from a year earlier.

E-broker DARTS in Q1

  • Ameritrade  up 144%
  • E-Trade         up 129%
  • Schwab       up 98%
  • Interactive Brokers  up 72%

Source: Piper Sandler

That trend shows no signs of letting up: "Trades have continued to meaningfully accelerate with the pandemic volatility even thru April," said Piper Sandler analyst Rich Repetto, who tracks e-broker trends.

Repetto notes that the move to $0 commissions, which happened late last year for most e-brokers, was a factor:  "You can trade 20 shares one time, 50 shares the next time, to maybe get a better price on a different trade, and you don't care because it's free," Repetto told me.

Michael Wong, who tracks e-brokers at morningstar, noted the effect that zero commissions had on Ameritrade: "After the move to $0-commissions on many types of trades in October 2019, trading volume has been on an uptrend."

Is retail moving markets in a way it hasn't in the past?  

Surprisingly, JJ Kinahan, chief market strategist at TD AmeriTrade, told me that amid all the market chaos in March and April, clients at his firm were net buyers of stocks, not sellers.

Kinahan saw investor interest spike in two distinct groups.

 First, they went into dividend-paying stocks. "Our population is aging, and there is nowhere else to go to get return," he said, noting investors were buying companies like Citigroup, Bank of America, Exxon and Chevron

 Second, there was a distinct speculative buying spree, led by millennials. "Millennials were the first to start buying cruise lines like Carnival, as well as airlines," he said. "People see them as long-term opportunities."

 For Kinahan, the main sign that user engagement — not just trading, but interest in the market — is way up is the interest in education.

 "Our education usage is up three times year over year," he said. "Reading articles on our website, looking at the videos. Anything having to do with education has gone way up."

 Why the sudden interest in reading articles on the stock market? 

"People have more time to spend looking at their investments. People can take an hour off in the middle of the day to really educate themselves. Our clients are looking at our information and saying, 'I'm starting to understand this more,' and this leads them to feel more confident trading," he said.

Does all this mean that retail is having more influence on the markets? 

"It does have an effect because it puts more demand on certain stocks," Kinahan said, but he cautioned that retail investors are only part of a large daily pool of traders that include pension funds, hedge funds and international investors. "They aren't the only buyers," he said.

For the e-brokers, a sudden surge in trading with $0 commissions sounds like a losing proposition, but there are offsetting positives.

Patrick O'Shaughnessy of Raymond James, who tracks retail trading at Schwab,TD Ameritrade and E-Trade, noted that net new accounts among e-brokers more than tripled from a year earlier, and net new assets were up 80% year over year.

More investors, more assets under management means the e-brokers can make money by selling other services to investors, even with zero commissions.

Another help for the e-brokers: Most sell client orders to trading firms to execute the trade, who then compensate the e-brokers, a process known as "payment for order flow."

 Does this mean that the retail investor is back, or is this a short-term buying spree that will end in disaster? Repetto believes that with no cost to trade, trading volumes will decline slightly, but not dramatically. 

"Many of us are not going back to work any time soon. If you combine that with a gentle market recovery, we could continue to have retail trading strong for some time," he said.

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