THINK ABOUT THIS
INVESTMENT RESEARCH
Robin Hood-Winked
www.deltecbank.com
Discretionary Investment Management • Advisory Investment Management • Deltec Managed Funds • Active Treasury Deltec Sponsored Notes & Structured Products • Investment Research • Execution & Brokerage • Direct Investments
Deltec Bank & Trust Limited
June 20, 2020
Under the banner of ‘democratizing finance’, online retail brokers have been advertising across all channels. The number of subscribers has been growing steadily, but to continue driving this growth industry players have been competing on costs, cutting commissions and buying competitors, consolidating to dilute fixed costs.
This race to the bottom in terms of price reached a nadir in 2019. The industry-wide adoption of zero-fee trading in October 2019 effectively made trading in and out of stocks frictionless. It has had the desired effect, successfully encouraging even more retail participation. With the dramatic fall in stock prices in March and cancelled professional sports events, retail investors and frustrated sports punters opened accounts and piled in. For the first quarter, the four major brokerages saw new accounts increase up to 170% vs. 2019. Robinhood, the stock trading application favoured by millennials, opened 3 million new accounts this quarter and suffered glitches and crashes from the heavy trading volume.
EXECUTIVE SUMMARY
There has been a rapid increase in the numbers of online retail accounts, and with the near zero cost of trading, volumes have risen significantly.
This volume is small compared to institutional investors, but there are significant biases visible none the less: the amplification of positive momentum and the interest in smaller cap and cheap ($) stocks.
The positive price action of bankrupt stocks, including Hertz, is a warning.
We think retail investors are due a wash out, and popular retail stocks, particularly small cap, financially distressed ones, are very dangerous. The ‘Greater Fool’ game never ends well.