Monday 26 October 2020 4:12 pmFXCM Talk

Three factors behind the rise of the retail trader in 2020

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Having joined FXCM in 2001 just out of college, Brendan has held various positions within the company over the last 15 years and was appointed Global CEO in 2017.

2020 has seen global financial markets such as equities and foreign exchange (FX) being moved by an army of retail traders, in a manner we have not seen previously. Their influence is here to stay, writes Brendan Callan.

It’s a cliché frequently used to describe the events of this year, but 2020 has not been like any other. The Coronavirus pandemic (COVID-19) has upended norms and disrupted entire industries and ways of working. 

In our world, the retail brokerage and investment industry, it is fair to say that the impact of the new generation of retail traders has been nothing short of substantial. The new generation of home-based ‘day traders’ have played a role in the directional flow of major stocks and currencies. What’s more, their impact has been felt in all global regions. 

So, what’s behind the rise of the retail trader in 2020?

Working from home

The second quarter of 2020 saw vast numbers of people around the world move to a remote working environment, working hours reduced or being placed on furlough. At the same time, much of the world went into lockdown, and entertainment and hospitality venues were forced to shut down for the foreseeable future. 

This meant millions of people had plenty of time on their hands and were looking to take on a new hobby or find a way to pass the time. Some took up baking, others used their newly found time to explore potential business ideas. But with markets moving significantly around the world, many others saw the opportunities of retail investing and the short-term market movements.

It has been reported that the total number of average daily trades at large US brokerages increased to a record 3.4 million daily average revenue trades — more than four times last year’s levels and 62% more than the prior quarter. 

They now make up more than 20% of US equity traders, twice as much as last year. 

In Japan, the fear-of-missing-out mentality saw a surge of new accounts in March – more than 250,000 new investors opened new accounts across five large online brokerage houses.

A similar pattern was seen in the UK and Europe. Traditionally, most retail investment is conducted through fund management and brokerage houses, but this was slowly changing in recent years. Due to COVID-19, day trading boomed. On our own platforms, we saw… [FXCM to provide relevant stats if possible (e.g. new account opening, % increase in monthly trading, the average number of daily trades etc., whichever is most relevant)]

Greater volatility in financial markets

When it comes to retail investing, the traditional theory is that the most sensible strategy is to invest money into long-term funds. 

But for day traders, volatility is their lifeblood. They seek to gain from short-term market movements, buying a stock or currency and selling it shortly after.

This year in particular was a boon for these traders. The recovery in equity markets in 2020 has been nothing short of remarkable, and retail traders have reportedly played a role in this recovery. 

Zero commission trading*

Modern technology has made retail trading accessible to all – it is now literally at our fingertips. 

Costs have reduced so substantially that the idea of ‘commission-free’ trading is now mainstream. This has been a major factor in attracting this new generation of retail traders. With the growing market volatility our customers, understandably, want greater control and variety in terms of their trading opportunities. 

As a result of this, in March 2020, we launched our 0-commission equity trading* product. With the newfound demand for retail trading, we realised not only did the trading of shares need to be affordable we also needed to make it manageable for our customers. As a result of this, we also introduced fractional shares trading. With fractional shares, we provide our customers the ability to trade companies in a way that allows them to limit their exposure into flexible trade sizes and make the trading of shares more affordable. With fractional shares alongside 0 commission trading, we have made the trading of household named shares more accessible than ever before.

A word of warning, however: choose your broker wisely. Read the terms and conditions closely to make sure it’s right for you and take a closer look at the wider business model. If trading is ‘free’, how does the broker make money, and is this transparently communicated? 

Look under the hood and you’ll notice a whole host of question marks, caveats, if and buts that make you wonder if trading really is ‘free’. As a result, where this leaves a retail trader in terms of execution quality varies significantly. 

Lastly, check that the company or broker you are trading with is regulated with a reputable industry body. Some trading providers use e-money licences or passporting, so it’s important to be aware of how this might impact you. 

Brendan Callan is CEO of FXCM.

*FXCM can be compensated in several ways, which includes but are not limited to adding a mark-up to the spreads it receives from its liquidity providers, adding a mark-up to rollover, etc. Commission-based pricing is applicable to Active Trader account types.

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