The retail rush

Regulators, markets must brace for online trading apps

Amid the large swings registered by global stock markets, including those in India, over the past months, there has also been an explosion in the number of new retail investors. As this newspaper has reported, the trading turnover in the cash market segment of both the major Indian exchanges was nearly twice as much in June 2020 as it was in June 2019 — a pattern repeated in derivatives, including currency derivatives. Retail trading volumes are at a 15-year high, possibly because net rest rates in debt have become unattractive. Many attribute their increasing participation to the effects of the lockdown. The online platform Zerodha told this newspaper that it saw a 300 per cent increase in the number of new accounts opened between March and June. This may well be part of the reason for the stock markets’ buoyancy even in the bad times of the pandemic, and their resistance to the stream of negative data emerging from companies and from the broader economy. 

There are good reasons to celebrate the growth of investing. Some reports suggest that many of the new investors are from Tier II and Tier III cities, reflecting a democratisation of stock holding. And yet, there are reasons for concern and watchfulness as well. For retail investors in particular, it is a truism that equity should be seen as a long-term asset, and not as a method for quick returns. There are some indicators that a proportion of the new online traders are looking for the latter rather than the former. For example, the surprising movements of stocks in some companies with negative equity value might suggest that people are taking such bets. 

The impact not just on investors but on the broader markets is worth considering. For one, a market with a larger proportion of equity trading done directly by part-time individuals is one that will be considerably more volatile and unpredictable. While it is true that volatility is caused more by algorithmic, pre-programmed trading, which retail investors don’t do, an example to be wary of is China, where perhaps 80 per cent of equity trading is performed by individual investors, many of whom are heavily leveraged. The Chinese stock markets are thus far more volatile than their peers, and as The Wall Street Journal pointed out recently, share prices in the mainland trade at a persistent premium — reflecting retail optimism — as compared to the same companies’ listings in the more mature Hong Kong markets. Such investors can also be easily manipulated; this was visible in the big bull market in China a few years ago, and was again the case recently when a front-page editorial in a Beijing-controlled newspaper caused an upward spike. 

The consequences can be severe as well. A downturn as fundamentals reassert themselves might set a large number of people against equities altogether. The impact on specific, leveraged individuals might be even more severe. In the US, concern at possible self-harm by online traders has grown so great that the online trading platform Robinhood had to give $250,000 to suicide prevention charities and make changes to its user interface following the suicide of a 20-year-old. Online platforms that look more like gambling apps than sober investment experiences will only lead to more of the same. Indian regulators must prepare to be tech-savvy: They will need to examine app structure as well as whether leverage is too easily available. Professional market participants might have to prepare for volatility. And retail investors need to be very careful and educate themselves about the risks.