Commission-fee trading on phone apps is transforming the stock industry, according to analysts. But they claim the new paradigm is creating trading frenzies and risk-taking that may net negatives.
U.S. retail traders have shown their appetite, with rolling net inflows over the past 22 days into equities reaching $32bn, compared to
$3bn two years ago, according to VandaTrack data. “Low commission rates, enormous liquidity provided by the Federal Reserve, an army of quarantined people sitting at home, many on a pile of savings augmented by fiscal-stimulus checks – it all adds up to an extraordinary situation,” said Joseph Amato of the equities firm Neuberger Berman.
Options trading, which is riskier than average stock trades, has also seen a big uptick in the past year, as traders have found it easier to participate.
Patrick Krizan, a senior economist at Allianz, noted, “These platforms now give retail investors the possibility to do leveraged trades and access to options markets which before were limited to funds or institutional investors.”
In the wake of Robinhood's "free trade" app model, based on getting back-end revenue from large Wall Street firms for trading action, instead of end-users, other brokerages have followed suit. Charles Schwab, TD Ameritrade, ETrade, and Interactive Brokers have all moved to free trading.
Opening digital accounts are easy for practically anyone. No one was really worried about it, though, until this past January, when Reddit traders mounted stock buys that put major Wall Street stock-shorting hedge funds into the hole for billions.
Now everyone is sounding the alarm about how the system is incentivizing small retail traders in negative ways. “Investors have more time, and increased disposable income, which creates the ‘free money’ eﬀect,” said one analyst. “People think, what have I got to lose? It’s very easy now to invest your money, but it’s also very easy to lose it.”