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The Rise of the Retail Investor

In late February of this year, Morgan Stanley CFO Jonathan Pruzan said that client trading activity at his firm’s platform for self-directed investors – the recently acquired E*Trade – has been “off the charts” in 2021. Daily average trades have moved 50% higher this year from record fourth quarter levels, and DIY investors have opened more accounts at Morgan Stanley to date in 2021 than in the third and fourth quarters of 2020 combined.

But Morgan Stanley is not alone in experiencing a dramatic increase in trading volumes in recent months. E-brokers such as Interactive Brokers and Charles Schwab have also reported unprecedented trading volume, mostly driven by retail investor activity. The average daily volume of the largest e-brokers in December 2020 was 6.6 million shares, a record. In January 2021, average daily trades hit 8.1 million, a 23% month over month increase.

According to analysts at Piper Sandler, average trading volume across the major U.S. markets in equities is way up this year, as the chart below indicates:

Year over year, January volumes are up 92%, and from December, they are up 33%. Options trading is experiencing a similar trend, with the number of contracts traded up almost 18% from December 2020 to January 2021. 

These recent trends raise two important questions:

• How long will the DIY growth trend continue?

• What longer-term impact will this increased retail involvement have on the markets?

The answers to both questions are unclear.

Admittedly the pandemic created perfect storm conditions for day traders, which may subside as the economy and people’s lives normalize. However, the extraordinary and well-publicized success of a small group of traders and their deft use of social media to drive markets may have convinced some investors that trading can be profitable and that social media may provide the tools for success over the longer-term. Increased trading volume for shorter-term profit fueled by unpredictable social media events could initially lead to greater volatility. However, over the longer-term, it may also lead to more sophisticated integration of social media with investment decision-making and more fundamentally change the investment practices of retail and institutional investors alike.