RETAIL TRADING: THE NEW CHALLENGE FOR INSTITUTIONAL BANKS

Retail trading is poised for growth but should traditional trading desks be concerned?

Pontus Eriksson, senior strategy director, FIS Retail Trading: The New Challenge for Institutional Banks

Institutional trading and retail trading have always been very low commissions, making it very difficult for regular banks very separated businesses with banks and brokers for good to compete on these terms. The commission price war governance and regulatory reasons. Traditionally, there’s intensified, effectively resulting in commission-free trading. also been a clear difference between the markets, with the retail markets historically smaller and driven by middle- aged, high-net-worth-individual investors (HNWI), but that Consistently low-to-zero interest rates over the last few years is now changing. delivered next to no returns on capital invested in traditional savings. Other asset classes that retail investors typically feel Over the last few years, we’ve seen an increase in interest comfortable with, such as commodities, have seen a climb in among the general population in direct investing, often investing price, driven by global protectionism and a fight for resources. for ethical reasons plus good governance. We’ve also seen a Even commercial real-estate has proved uncertain given the change in the type of assets within their portfolios, pandemic-driven future of commercial office and retail space. driven by a greater awareness of environmental, social and governance (ESG), digital access to information via mobile apps, The lack of traditional yield pick-up opportunities has led to other technology innovations and the democratization of this a huge inflow of capital into equity markets. With diminished market supports the trend. Retail investors are now more returns on traditional , many investors have turned comfortable investing directly, with more involvement in the to exchange-traded funds (ETFs) and cryptocurrencies as investment process fueling large money flows into the market. alternatives as they pursue higher returns. And they demand transparency on their investments and pension portfolios. There has also been a huge increase in private margin . Essentially, people are borrowing to make investments in the equity These retail investors are adding to market volume and market and to be part of the frenzy. This credit-driven and fast-paced volatility by moving the needle on stocks they deem investable, investment strategy is risky and may backfire as time passes. and that isn’t always based on the traditional criteria for Regulators may look to monitor this more closely in the future. investingARTICLE or expectation of returns. For example, they may decide to invest because they want to own part of a brand or Against the backdrop of development, own shares in a company that they believe in. social media-driven investment ideas began to shape the markets. In the beginning, this was a relatively anonymous and insignificant That’s putting further pressure on institutional traders, who are force. But this changed overnight with the demise of the already seeing a turbulent and uncertain institutional equities GameStop price as Reddit accounts spun up interest to trading market as well as extreme pressure on fees – forcing retaliate against professional short sellers – or to make a profit firms to increase their focus on cost control by creating for themselves. Social media-driven investment ideation is efficiencies. The question is, do institutional firms invest in here to stay, and a lot of the trading flow generated in the operational efficiency and client service to stay relevant and market stems from this. competitive, or do they leave the market entirely? Down to brass tacks The rapid development of institutional trading technology As investors’ behavior changes, retail banks and brokers that Institutional trading tends to be very theme-driven and offer a clear digitalized front-end and a wide product offering are fast-paced, ranging from technology and environmental, social growing. These players offer a very broad palette of investment and governance (ESG), to M&A driven special-purpose- opportunities as well as day trading. This has led to intense acquisition-vehicle (SPAC) and extreme growth companies. competition with traditional banks, who can’t easily match the lower commissions offered by these specialist retail players. Adding to this, government quantitative easing (QE) programs fueled investment in bonds and equities trading volumes How concerned should you be about managing market volatility during 2020 and into 2021, as well as inflows of capital and when the trading community is up against a tsunami of retail more volumes, resulting in the market becoming more traders? First, you should accept that retail trading is a force of interesting for both retail and institutional markets. nature – and manage the consequences to your business. You still have greater access to research, understand herd behavior The rapid rise of retail trading and are prepared to bet against it. You can continue to outperform In the last year, the retail trading trend has exploded, the market based on a pragmatic or programmatic approach, amounting to approximately 30% of the overall flow in whether it’s active or passive investing. the U.S. – more than the flow generated by hedge funds and mutual funds combined. Now there is interest from both To stay competitive, you must optimize your trading, speed the average Joe as well less risk-averse Millennials – partly and agility – fast. A consolidated and modernized trading driven by the imminent transfer of $30 trillion of wealth from and risk platform offers cross-asset trading opportunities, flexibility, scale and better insights into risk while reducing Boomers to Generation X and Millennials¹. To support these costs. Combine that with innovative machine learning and new players, specialist retail trading specialists such as digitalization, and you’ll have the best chance of staying in Robinhood and TD Ameritrade quickly offered zero or the lead.

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