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COVID-19: Tracking The Impact On Trading 

Published on 30 September 2020

The effect of COVID-19 on the capital markets has been immense - trading activity and volatility are at the highest levels since the 2008 financial crisis and interest rates have plummeted. We are paying close attention to the changes as we chart the course to market recovery - brokerage platform growth has experienced a sharp rise and day trading and options trading are gaining popularity with retail investors.

 

Brokerage Platform Growth Skyrockets

Brokerage Platforms have experienced a sharp rise in growth - resulting from both high trading volume and new account creation - according to research by Andreeson Horowitz: 

“After more than 10 years of steady growth in the stock market, 2020 has been one of the most tumultuous years of trading activity in the public markets. We’ve ricocheted from daily all-time highs in the first few months of the year to a sharp, 35 percent drop in the market in March, back to all-time highs in August. Trading platforms such as Robinhood, Stash, and others are making a play for young and first-time traders with commission-free, mobile-first, easy to use products. And older brokerages are eager to compete by offering perks like fractional shares and free trades. As a result, the major brokerage platforms have seen significant growth in both trading volume and new account creation over the past six months.” (Acharya, Amble, Salisbury, Hafemeister, & Murrow, 2020)

 

Figure 1: Brokerage Account (Acharya, Amble, Salisbury, Hafemeister, & Murrow, 2020) Source: Glimpse

 

Factors Behind Brokerage Platform Growth?

  • Trading activity and volatility are at their highest point since the 2008 crisis. In response to market uncertainty - the market dropped 35 percent in a short period of time - investors are paying more attention to their portfolios and looking to their brokerage to track their positions.
  • Low interest rates - they dropped to zero in March. When interest rates drop, returns on bonds and savings accounts are low and cash yield is zero. In response - investors are seeking alternatives to invest more capital in the markets. 

 

Day Trading And Options Trading Are Gaining Popularity With Retail Investors

Retail investors are flocking to day trading - the buying and selling of securities within a single day timeframe. An unusual development as day trading is normally handled by professionals - skilled at making informed bets by applying their knowledge of stocks and market events. This year has been a departure from the norm in many ways. There has been a reversal in retail investor behaviour as long term “buy and hold” strategies are abandoned more and more frequently in lieu of short-term day trading.

 

Figure 2: Options Trading (Acharya, Amble, Salisbury, Hafemeister, & Murrow, 2020) Source: Glimpse

Figure 3: Pattern Day Trader (Acharya, Amble, Salisbury, Hafemeister, & Murrow, 2020) Source: Glimpse

 

Factors Behind Rising Popularity Of Day Trading And Options Trading?

  • High volatility - naturally fosters short-term trades - making day trading and options trading attractive options for retail investors
  • Disruption of sports betting and casinos - many retail investors have selected options trading as an alternative to gambling - in light of recent casino closures and disruptions to professional sporting events 

 

Brought to you by DealMaker Insights.

 

References

Acharya, A., Amble, S., Salisbury, R., Hafemeister, M., & Murrow, L. (2020, September 17). Charting the COVID Effect on Fintech. Retrieved September 29, 2020, from https://a16z.com/2020/09/16/fintech-covid-effect/

Acharya, A., Amble, S., Salisbury, R., Hafemeister, M., & Murrow, L. 2020, Brokerage Account, digital image, A16z, Retrieved September 29, 2020, from https://a16z.com/2020/09/16/fintech-covid-effect/

Acharya, A., Amble, S., Salisbury, R., Hafemeister, M., & Murrow, L. 2020, Options Trading, digital image, A16z, Retrieved September 29, 2020, from https://a16z.com/2020/09/16/fintech-covid-effect/

Acharya, A., Amble, S., Salisbury, R., Hafemeister, M., & Murrow, L. 2020, Pattern Day Trader, digital image, A16z, Retrieved September 29, 2020, from https://a16z.com/2020/09/16/fintech-covid-effect/