Retail Trading: An Analysis of Current Trends and Drivers

Abstract

The participation of retail investors in financial markets has a dual impact, contributing to market liquidity and order book depth while potentially increasing volatility, necessitating robust investor protection measures. The World Federation of Exchanges (WFE) conducted a survey among its members in 2021 and reveal varying levels of retail participation across global exchanges, with higher-income countries generally exhibiting lower retail involvement. The COVID-19 pandemic leads to increased retail activity, attributed to easier market access, lower costs, more research and data availability, and increased free time during lockdowns. However, defining a retail investor varies across markets. Exchanges typically identify them through explicit tags on orders or individual trade characteristics. To attract retail investors, exchanges employ educational programs, new products, liquidity providers, and special fee schemes. Some exchanges noticed differences in retail participant behavior compared to other traders. Our econometric analysis corroborates these findings, highlighting that retail investors react to market conditions, tend to be net buyers during market stress, and show higher participation in countries with higher literacy scores. Strategies like reducing trading fees, capital gains taxes, broadcasting materials, and improving research tools have effectively attracted retail participation in stock markets.

Keywords: Retail investors, financial market, exchanges

JEL Classification: G10