Retail trading has boomed since March 2020, impacting the ways individual investors approach the markets.


Chalk one up for the little guy. 

Since the start of the bear market in March 2020, retail traders have been flourishing. In fact, according to a June report from Goldman Sachs, stocks favored by retail traders are outperforming stock picks by hedge funds and mutual funds. Retail investors’ stock picks are up 61 percent since March 23, while smart money stocks gained only 45 percent.

Fintech companies were already making trading easier to access at the start of 2020, but the circumstances of trading during COVID-19 have accelerated an evolution of retail trading.



Not everyone who wanted to trade during the most exciting periods of market activity in March had the chance. Due to an “unprecedented load” of high volume and new accounts, users reported outages with the trading app Robinhood for almost two full trading days.

Robinhood’s popularity hasn’t been limited to March. In fact, the app has reported three million new accounts in the first four months of 2020. And they’re not alone; Charles Schwab, TD Ameritrade, E-Trade, and Interactive Brokers have all enjoyed a boost in activity this year. Retail traders may now comprise a fifth of the market, according to Citadel Securities

Analysts say social and economic changes during COVID-19 have encouraged the popularity of retail trading. In the research paper “Flattening the Illiquidity Curve: Retail Trading During the COVID-19 Lockdown,” analysts from the EDHEC Business School in France, Boston College, and the Chinese University of Hong Kong say there is a causal relationship between the coronavirus lockdowns and trading.

The researchers looked at data showing mobility during “stay-at-home” measures in the U.S. alongside market data. Since U.S. states implemented lockdown measures at different times, the paper concluded that the more time traders found they were spending at home, the more they engaged in trading. With higher market volatility and more free time, more individual traders have entered the market.



One year ago, retail trading was already poised for a major shift. By October 2019, brokerages such as E-Trade, TD Ameritrade, and Charles Schwab announced they were transitioning to a zero-commissions model and more accessible financial apps to compete with Robinhood.

The increasing ease of access for retail traders came at the right time. Analysts from the aforementioned research paper on the “illiquidity curve” suggest the lower costs have led to more stock market participation from retail traders during COVID-19. 



Those recent fintech innovations may have contributed to a better market recovery in 2020. The increase in retail trading activity during the pandemic has coincided with improved liquidity, lowering stock bid-ask spreads and price impact of trades.

The liquidity shock in 2008 lasted for several months, whereas liquidity improved in much less time during 2020. While the Federal Reserve did act to add liquidity in mid-March, the paper’s authors argue retail traders had more of an impact.

“A large liquidity crisis was avoided because retail investors had the technology available to get direct access to the market,” says Ronnie Sadka, a coauthor of the “illiquidity curve” paper. 



In response to the economic consequences of the coronavirus, the CARES Act from the U.S. government spent approximately $2.2 trillion on relief efforts, primarily in the form of individual stimulus checks for Americans.

Much of that money has found its way into the stock market, according to data aggregation company Envestment Yodlee. Yodlee looked at data based on bank account transfers of 2.5 million Americans that received checks. Based on these transfers, they found that securities trading was one of the most common uses for the stimulus checks in almost every income bracket, behind increasing savings and cash withdrawals.



You may have felt like no matter where you looked, the media was always covering the coronavirus during spring this year. While consumers might have seen the inescapable coverage as tiresome, some companies benefited from the media attention.

Stocks that are related to the coronavirus, such as Clorox, Zoom, or pharmaceutical companies, generally outperformed during the lockdown. This is because there is usually a direct influence on media coverage and increased retail trading, as described by a journal article published by the American Finance Association in 2011.



With technology making it easier to start trading than ever, COVID-19 may be an unparalleled opportunity for retail traders.

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