(EXECUTION MATTERS is a Traders Magazine content series focused on the topics most important to traders and technologists in US equities and options markets. EXECUTION MATTERS is produced in collaboration with Lime Trading Corp.)
Innovation, both in technology and in product offerings, is increasingly empowering retail traders, boosting a segment that has more than doubled its presence in the market since the early 2010s.
Whether it’s a more intuitive trading app with greater functionality, more targeted hedging and risk management vehicles, or expanded trading hours, the financial services industry is enabling novices to participate in markets for the first time, and also helping more experienced retail traders level up to be more active and self-directed, with a toolkit that can rival institutional capabilities.
Retail traders’ share of stock market trading volume increased from just above 10% in 2011 to more than 22% in 2021, according to Bloomberg Intelligence data cited by Forbes. Retail trading share in the options market is well above 40%. The ‘meme stock’ craze peaked in 2021 and retail trading has leveled off since then, but the absence of a significant market decline and a much-improved user experience have kept many retail players involved.
Market participants and observers say the industry’s focus on expanding and improving education has helped retail investors, as have technological advancements. For trading platform operators, the rise of the retail trader is an opportunity to gather more order flow, but it’s also a challenge to meet the demands of this much-more sophisticated market participant.
“Retail has become smarter, trading various types of strategies which could include ETFs and options, in combination with single stocks,” said Johan Sandblom, President and Head of Business Development at Lime Trading Corp, an agency-only broker-dealer providing low latency market access to the U.S. equities and options markets.
“Individual investors also have a better understanding of the US market structure,” Sandblom continued. “They are asking questions around the quality of the execution rather than just accepting a ‘free’ trade, and they are requiring more from their broker in order to execute their strategies efficiently.”
In a September 2024 blog post, Cboe Global Markets CEO Fred Tomczyk noted that retail traders have been a major growth engine in the options market over the past several years, and that can continue as long as the financial services industry continues to be good stewards.
“The options trading ecosystem is supported by a diverse range of participants who each play an important role in the market’s functionality and stability,” Tomczyk wrote. “As members of the financial services industry, it is our job — first and foremost — to provide trusted systems that enable people to confidently participate in the markets and economy. With that foundation set, our responsibility is to empower and educate people to participate in those systems to the best of their ability.”
Product innovation and the transformative impact of technology and education for retail were discussed at the Security Traders Association’s 91st Annual Market Structure Conference, which was held in Orlando, Florida in September.
In the panel Continued Democratization of Retail Investing, it was stated that competition between retail trading platforms generates constant improvements to the retail experience, with innovation in areas such as options products, fractional shares and ‘24/5’ trading.
Importantly, the panel noted an increase in active traders who are comfortable trading and actively managing their portfolios around major news events – these market participants are being provided sophisticated tools and more products to better construct their portfolios. The industry must continue to meet the needs of the retail trading segment as these participants continue to gain knowledge and sophistication.
“We now hear questions from retail about what type of application programming interfaces (APIs) are offered for their automated strategies, what order capacities are, questions around various order types, how orders are processed, what latencies are, and how all of it impacts their overall execution,” Lime Trading’s Sandblom said.
Added Sandblom: “For Lime, the transition to a more sophisticated retail trader has been very smooth. Our system was initially built for professional sophisticated traders – we have made this same technology available to the retail market, with several ways to direct their order flow to various markets.”
