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Where We’re at with Volumes, Volatility and Key Trends

Executive Summary

With the close of the third quarter, we wanted to update market metric trends we have followed throughout the year for volatility, equities and options. Inside this note, we analyze:

Current Market Trends – Retail investors now 20%-25% of total equity market volumes, as compared to around 10% in 2019, given $0 commissions, increased access to markets and COVID-19 lockdowns/stay at home; retail investing also aiding a big year for options trading, fueling the growth in single stock options volumes; removing friction with technology and product innovations (platforms, fractional shares)

Volumes & Volatility Update – Market updates on VIX, equity and options through September 2020

  • Volatility and volumes ticked back up in September, with options marking new average monthly high
  • Options ADV – YTD 28.1M contracts, +48% Y/Y; 3Q20 29.1M contracts, +53% to FY19 & +4.5% Q/Q; Sept. 31.3M contracts, +30% to Jan. but -34% from peak
  • Equity ADV – YTD 11.1B shares, +56% Y/Y; 3Q20 9.9B shares, +41% to FY19 & -19.5% Q/Q; September 10.0B shares, +32% to Jan. but -48% from peak
  • VIX – YTD 30.48, +92% Y/Y; 3Q20 25.81, +68% to FY10 & -25% Q/Q; September 27.65, +98% to Jan. but -67% from peak

Exchange and Parent Group Market Share – Updating market share stats for September 2020

  • Options – Nasdaq 34.3%, Cboe 31.9%, NYSE 17.9%, MIAX 13.1%, BOX 2.7%
  • Equities – NYSE 22.7%, Nasdaq 20.5%, Cboe 15.0%, IEX 1.8%, off exchange 39.9%
  • Exchange Landscapes – Options no change; Equities now 16 exchanges as MEMX, LTSE and MIAX PEARL went live in September

Exchange Landscapes – Options no change; Equities now 16 exchanges as MEMX, LTSE and MIAX PEARL went live in September

Current Market Trends

In this section, we provide an overview of current market trends, as discussed with market participants or gathered from various industry conferences, including the SIFMA Equity Market Structure Conference and Listed Options Symposium.

Boom Year for Retail Investor Participation

Retail investors have moved up to 20%-25% of total equity market volumes, as compared to around 10% in 2019. Market participants note this trend began somewhat with the move to $0 commissions in 2H19, fueled by high levels of cash sitting on the sidelines since the last recession. Then the COVID-19 related lockdowns and increase in work-from-home arrangements bolstered these trends. With high levels of cash sitting on the sidelines since the last recession, retail investors view the potential for higher returns in markets as a better way to build their retirement (or special project, such as saving to buy a house) funds versus other low (or near zero) interest rate savings tools.

Most market participants see the increase in retail investing as a positive for investors and markets, as long as the industry continues to educate these clients on risks and product complexities (which they have, with one major online broker indicating hits on their educational tools are up three fold this year). The democratization of markets has been increasing over the years, driven by decreasing costs and technological advancements. Markets are dynamic and have changed with the shift in consumer behavior, i.e. performing most tasks online or on an iPhone. This has increased accessibility for investors.

Despite this increase, the number of households owning stocks had come down after the global financial crisis – 53% in 2007 versus 49% in 2013. This number has resumed an upward trend, now back at 53% of U.S. households1. Both large and smaller brokers continue to increase efforts to serve retail investors, all attempting to expand stock ownership across the 135 million American households. It will be interesting to see where the estimated 25% retail participation figure in equities climbs once 2020 data is accounted for. After all, estimating across the top online brokers, there could be almost 10 million new retail accounts opened this year2.

As for market structure, participants indicate retail activity does increase liquidity. This benefits all investor types and acts to maintain the low-cost structure of U.S. markets. Further, market participants note that this retail flow is one-sided to buys, meaning retail participation is more like 12.5% of total volumes (buying one side of each trade). Markets are very deep with multiple types of investors – asset managers, hedge funds, proprietary traders, arbitrages, retail, etc. – meaning retail trades are not negatively moving markets as some reports have indicated. ETFs trade one-third of the value of stocks each day, and futures trade at multiples of the value of stocks daily. In other words, there is enough risk transfer to dilute the impact of retail trades on any specific stock or sector.

Will this trend continue? Perhaps the growth rate could slow as normalization of everyday life resumes with a viable vaccine, in particular when employees return to the office on a more regular basis. However, it could be the start of a structural change. Aside from $0 commissions and cash on the sidelines, all in all investors have had good experiences with the markets in 2020 in terms of the technologies and ease of access to trading platforms and tools (ex: stock research). All of this could encourage retail investors to remain in the markets moving forward.

Retail Even Driving the Rise in Options Volumes

This has been a big year for options trading. Options markets volumes have hit record highs this year. Historically, options volumes never reached 40 million contracts. This year, volumes have surpassed that level on 8 different days, also passing over 30 million contracts on 59 days. While it is hard to perfectly identify retail orders versus others, there have significant increases in smaller options trades which is a good indicator of retail trades. Trades in less than 10 lots versus greater than 50 are at decade highs. Retail investors tend to buy 1-2 contracts, indicating growth in retail trading.

Volatility has spurred single stock options contracts trading this year. Market participants indicate there is a skew to single stock call and put option buying, another sign of increased retail buying. Retail investors tend to trade ETFs, microcap (and even small cap to some extent) stocks and the very well known large cap stocks (ex: FAANG, or Facebook, Apple, Amazon, Netflix and Google). In equity markets, there has been significant activity in higher priced stocks, such as some of the FAANG names. This flows over to options markets, with retail investors buying options contracts because they cannot afford 100 shares of these higher priced stocks.

This continues to fuel the growth in single stock options volumes.

Growth Trends Helped Along by Innovations

Remove the frictions – that is the goal in markets. And significant technology and product innovations have done just that for broadening investor participation. As discussed above, retail investors are interested in higher priced stocks. Yet not every investor can buy 100 or even 10 shares of Amazon priced at $3,221.26. Options contracts are one way to access higher priced stocks. Fractional shares is another solution to high priced stocks and are offered by many broker platforms. With fractional shares, an investor buys a partial share of a company’s stock rather than a full share. They specify how much money they want to invest in a company rather than how many shares. This is an alternative for retail investors not able to afford a full share or multiple shares to build out their portfolio. Market participants suggest this could also be a solution to fix the odd lot/round lot issue for institutional investors as well.

Once investors are ready to trade, access and ease of participation has never been easier. Most brokers have easily navigable online and mobile phone platforms. Commissions are at $0 for most equity, ETF and options trades. And exchanges, similar to brokers with fractional shares, are offering product innovations. Retail investors often want to invest in bite size pieces. Exchanges are creating new mini products to accommodate this appetite.

Innovation should help continue the democratization trend.

Volumes & Volatility Update

2020 has been a wild ride for volatility and both equity and options volumes. At their peaks, volatility was up 563% to the start of the year, with equity +150% and options +119. We are past the height of the market turmoil, with September averages way down from the peaks: VIX -67%, equity -47% and options -34%. However, market metrics ticked up again in September: VIX 27.65, +98% to January; equity 10.2 billion shares, +34% to January; and options 31.3 million contracts, +30% to January. For options, this month marked a new average monthly high.

Markets have continued to ebb and flow with economic news or updates on a viable vaccine, whether positive or negative. Now we are heading into the U.S. presidential election season. Typically, volatility can increase heading into elections, as market participants try to anticipate the impact of potential policy changes on the business environment, economy and markets. In this highly charged year, market participants are readying themselves and clients for heightened volatility into election day, as well as for an extended period after should election results take time to finalize.

This, along with other market factors such as Brexit, could lead to further upticks in market metrics.

1 Federal Reserve, 2019 Survey of Consumer Finances (triennial survey); includes directly & indirectly (mutual funds, retirement accounts) held stocks

2 2020E calculations: SCHW & ETFC financial statement data through Aug, 5-month avg for rest year; Robinhood press report through May, 50% for rest year; SCHW estimate from a conference presenter


Katie Kolchin, CFA
Director of Research
SIFMA Insights