U.S. day trading frenzy eases as investors ‘move on’

The day trading windfall that took Wall Street by storm in early 2021 has cooled off sharply as US authorities lift social barriers and amateur investors spend more time away from home.

An army of passionate traders armed with free trading apps propelled “Meme” stocks at high heights during the first few months of this year, in a move so vigorous that it prompted a congressional inquiry into basic market issues like trading settlement, and the links between brokers and market makers.

But as large parts of the U.S. economy begin to reopen, data has started to signal a waning appetite for the same type of intense trading that triggered volatility in many stocks in January and February.

“The rise has been dramatic, but the fall has been equally dramatic,” said Steve Sosnick, chief strategist at Interactive Brokers. “The casual investor, or the investor who confused gambling and investing, has moved on. More and more people are returning to the office. . . and quite frankly, investors have something else to do with their money.

In the U.S. options markets, where traders place sometimes risky bets on movements of stocks and other assets, trades associated with retail investors relative to overall volume have fallen to a six-month low of 15 , 5% in early May, rising from nearly 20% in January. In April, the total volume of transactions in the retail brokerage industry was down 26% from March, according to an analysis by Piper Sandler.

At the same time, the proportion of trades routed to market makers by the largest retail brokers, relative to the overall volume of the US stock market, fell by 10 percentage points to 18% between December and March, despite a new wave of stimulus funds hitting the US bank. accounts at the latter part of this period.

The DIY trade slowdown marks a change from the start of the year when stocks like GameStop, which have been hotly discussed on Reddit and other forums and have been the subject of jokes on social media. social, have been skyrocketed by local investors. The movements were so strong that they inflicted heavy losses on hedge fund Melvin Capital, led by a protégé of well-known manager Steve Cohen. Congress held numerous hearings during the episode.

The cooling in stock trading has coincided with a surge in cryptocurrency activity, with volumes on major exchanges reaching a record $ 1.7 billion last month, according to CryptoCompare data compiled by The Block Crypto. However, analysts said the lack of granular data on crypto trading makes it difficult to determine the extent to which users of traditional retail trading platforms have turned to digital assets.

Goldman's basket price line chart of the 50 most popular retail stocks is dropping, showing popular retail stocks are starting to drop after a dramatic rally

Preferred stocks by retail traders have lost ground in recent weeks. A Goldman Sachs basket of popular retail picks, which includes Tesla, Apple and Zoom, slipped more than 12% from its March high.

Speculative trade in higher risk penny stocks, which trade off most national exchanges and which are an indicator of daytime retail activity, has fallen from its February highs. Volumes in over-the-counter markets halved to 928 billion shares traded in April from highs in February, according to data from the Financial Sector Regulatory Authority.

Following the severe market uproar in early 2020, stocks have been on a generally gentle upward trajectory, and “this tends to be a time when you get more retail interest,” said Brian Nick, Chief Investment Strategist at Nuveen.

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However, stocks faltered this week, with the Nasdaq Composite, a heavyweight index of tech names favored by retail investors, slipping 2.6% on Monday and 2.7% on Wednesday. Both days were among the worst of the reference year.

The Nasdaq is now down about 6% from its April 29 high, while the larger S&P 500 is around 2% from its May 7 high. If those losses accelerate more substantially, investors could begin to be affected by margin calls on transactions amplified using leverage, said Randy Frederick, vice president of trading and derivatives at Charles Schwab. Brokers demand that clients provide more collateral to support trades and keep them open. But a sudden rush of calls can sometimes accentuate market declines as investors sell other assets to meet broker demand.

The level of margin debt of brokerage accounts almost doubled between March of last year and this year, at an all-time high, according to data from Finra. The data does not differentiate between amateur and professional investors, but “retail traders”. . . probably tend to push themselves, ”which potentially puts them at greater risk, said Frederick.

Column chart of the share of brokerage transactions relative to the overall volume of US stocks (%) showing that the transactions recorded by retail brokerages are becoming smaller and smaller

While frenetic activity has subsided, volumes remain high from a long-term perspective in part due to innovations in the retail brokerage industry, analysts said. A key component was the decision by most US brokerages to drop commissions at the end of 2019, which helped fuel the surge in activity during the pandemic.

“As we saw during the pandemic, [retail investors] can be a great strength, ”said Katie Koch, Co-Director of Fundamental Equities at Goldman Sachs Asset Management. After the pandemic, amateur trading “may not be at the same level of hyperactivity. But I expect activity to remain high. “

Additional reporting by Eric Platt

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