There is a new kid in the hood (this is also a Nasdaq stock ticker). Robinhood Markets inc, the United States (US) online trading stockbroker, made its Nasdaq debut last week and despite the hype it closed 8% on its first day of trade. With a market cap of close to $30 billion, the trading app sold between 20% to 25% of its stock to its own customers, further enhancing its reputation as a customer champion. The listing documents has provided us with insights into the behaviour of retail investors in the world’s largest capital market. Robinhood’s motto to ‘democratise finance for all’ has spearheaded the trend towards zero commission trading in the US, while it accumulated 18 million clients since 2013. The US is a unique market due to the high propensity of the population to invest in equities. Over time the holding periods of US stocks plummeted from approximately three years in the 1980s to currently just a matter of weeks. The US retail investors also have steadily increased their share of total traded market activity to close to 20% - double what it was a decade ago.
However, the Coronavirus (COVID-19) crisis provided an unexpected boost to online share trading with Robinhood doubling its client numbers over the past year. As markets pulled back sharply and a large portion of humanity were confined to their homes, swathes of customers turned to investing online. In the US, a number of factors have contributed to a spike in online share trading. The work from home trend and the generous income support schemes provided by the US government, has left a number of US population with more disposable income than prior the COVID-19 crisis. Some have even suggested that the lack of live sports events has meant that many people were lacking a source of entertainment. Nonetheless, a record number of online accounts were opened by first time market participants.
It was also fortuitous that as markets started to fall sharply in February 2020 in response to news of the global pandemic, new online market participants were able to scoop stocks at massive valuation discounts as the Federal Reserve was about to aggressively flood the market with liquidity. Companies like Robinhood also provided existing customers with incentives by offering ‘free shares’ for referrals. The data also shows that the majority of Robinhood investors tend to buy stocks with trading under $5 with fractional share trading also facilitating smaller trades.
At FNB Online Share Trading, we also experienced a similar trend with a record of new clients signing up on our platform. Self-directed clients were most active in March 2020 as the Covid-induced sell off intensified and peaked in April last year as bargain hunting intensified. Trading activity in South Africa was initially focused on heavily sold off blue chip stocks with newcomers focusing their attention on Sasol, which plummeted from over R300 to close to R20 per share as the oil price collapsed.
However, what started as a positive trend in the US then morphed into something more unexpected. As the US retail investors began to congregate in online bulletin boards, the phenomenon of meme stocks took hold. Retail investors collectively started to invest into out-of-favour stocks like struggling videogame retailer Gamestop, and forced hedge funds, which were short, betting the stock to fail, to close their positions at a substantial loss, causing a rise in their stock price. In addition, Robinhood benefitted financially by facilitating crypto currency trading with Dogecoin accounting for a third of crypto trading revenues.
Globally, online share trading platforms have embraced technology to build better engagement with their clients. For instance, the average age of new Robinhood clients is 31 years while with FNB it is 35 years. One of the more worrying aspects from the Robinhood filings are the number of pending lawsuits against the US company. Robinhood already settled with the regulator on claims that it failed to do proper due diligence on opening of derivative accounts for first time investors. With over 50 class action suits looming and investigations ranging from possible money laundering to cybersecurity breaches, this has highlighted that it is more important to build a strong control environment than to focus on triggering confettis each time a client makes a trade. As more investors get tempted to invest online, we believe that investor education and money management will differentiate the short-term opportunists from the long-term players.
As markets become increasingly fragile due to central banks support waning, investors should focus on diversifying their exposure by reducing stock specific risk. Investors must brace themselves for increased turbulence by ensuring they are exposure to different asset classes and geographies in order to dampen short term volatility and reap better long-term risk adjusted returns. The inclusion of diversified investment vehicles such as unit trusts and Exchange Traded Funds should be considered by investors as we look to further diversify portfolios.
Razack is Head of FNB Share Investing and Rassou is Chief Investment Officer at Ashburton Investment & FNB Wealth and Investments