Brokerage stocks are at risk with retail investor habits changing

Retail investors are retiring from the stock trading game — and getting out while they’re down.

Over the past few months, more investors are repositioning into index funds while others are taking their talents to the crypto market — and brokerage stocks become the casualty. 

What fueled a rise in global trading and brokerage stocks?

Stimulus checks and lockdowns fueled the trading frenzy — with trading activity hitting records in 2021 amidst the GameStop hype. But at the end of March, daily US stock purchases decreased by 60%.

• The decrease in trading volume is likely a result of the Feb crash in growth stocks — which had been a favorite amongst retail investor portfolios.
• According to Viraj Patel of Vanda Research via WSJ, retail investors aren’t going to add funds to a market that doesn’t have a clear catalyst to grow 5-10%.

April trading data also suggests that investors are moving away from buying individual stocks towards index funds:

• In 2021, more money has been invested in ETFs than all of 2020.
• This increase came despite a 30% drop in trading volume in April compared to March.

Slowdown in retail investing hits the world

China is one region that may be slowing down fast. According to Interactive Brokers’ CEO:

• China and HK went from being the trading app’s fastest-growing region to the slowest in the recent quarter.
• He attributed the fall to China’s crackdown on banks, which is making it difficult for customers to fund accounts.

In the past year, 2 smaller Asian trading apps, which are publicly traded on the US stock exchange, experienced a rapid rise and pullback in the Feb market correction:

For investors… Sharing the spotlight

Stock trading is also competing with another asset — cryptocurrencies, which has grown into a $2.2t market. The trading apps that offer both stock and crypto trading may have the most to benefit:

• eToro, a global trading platform, is going public with SPAC, FinTech Acquisition Corp. V ($FTCV)
• Robinhood, the popular US-based trading app, is expected to go public in the next couple of months.

But they could also have a lot to lose with trading apps being heavily reliant on trading volume. In 2017-2018 a big correction in the market sent trading volume and trading app stocks down.

A correction in either the stock or crypto market could have a negative impact on their stock prices — or worse, a correction in both.