TECH TUESDAY is a weekly content series covering all aspects of capital markets technology. TECH TUESDAY is produced in collaboration with Nasdaq.
Retail investors historically have been perceived as greenhorns, ready to be cleaned out by sophisticated Wall Street types.
That dichotomy has changed as education, and the democratization of advanced risk management tools elevate the sophistication level of mom-and-pop ‘Main Street’ traders. This is especially the case when using options, which offer more leverage than the stock market, and are both easily accessible via online brokerage accounts and intuitive enough for non-pros to understand.
The Today’s Trends in Retail panel at the Options Industry Conference, held last month in Nashville, covered the rise of retail traders — and not just their numbers.
Sean Feeney, Head of U.S. Options at Nasdaq and a former institutional options trader, said retail traders are better educated than ever before and have an effectively frictionless trading experience at their fingertips.
“The tools available to retail traders today far surpass the tools I had on the trading floor in 1999,” Feeney said on the April 27 panel. “They can do portfolio analysis that I couldn’t dream of.”
Ming Zhao, CEO and Founder of Atomic Vaults, a fintech startup seeking to bring fractional options trading to retail, is seeing more interest in macroeconomic topics such as inflation and the Federal Reserve on TikTok and other social media platforms that cater to the younger generation. “People are surprisingly well-educated compared with ten years ago,” Zhao said. “The age at which folks start trading is much younger.”
Many younger options traders started buying and selling puts and calls while confined at home amid the pandemic in 2020-2021. Traders who got into the markets then and are still involved can be considered a “graduating class” of sorts, said Ravi Jain, Chief Product Officer at Sterling Trading Tech.
“[Retail traders] are getting more educated, demanding more ability to trade spreads and short options, and better analytics,” Jain said. “They will be upgrading to more sophisticated strategies.”
To that end, “as more complex strategies being deployed by retail continue to expand, we as an industry need to step on the gas as far as our educational efforts,” Nasdaq’s Feeney said.
A recent survey by Finimize, a tools and resources app for retail investors, shows that retail investors have indeed gained savvy. They’re defense-minded when they need to be, rather than just piling into trendy stocks and single-stock options as per longstanding perception.
“Sophisticated retail investors are the new normal,” stated the Q2 2023 Finimize Modern Investor Pulse. “Retail investors are evolving, becoming more sophisticated and self-directed. The pandemic saw them actively handpick stocks for their portfolios, and now they’re embracing ETFs to diversify and stabilize their investments. This “new normal” sees retail investors turning to broad market tracker funds for safety, rather than giving in to market pressures.”
Of more than 1,700 retail investors surveyed by Finimize, 58% said they plan to take less risk over the next three months. Retail investors’ most-preferred stocks – Apple, Microsoft, Nvidia, Amazon and Tesla – are the largest constituents in the highly liquid Nasdaq-100 Index (NDX), so that is a logical broad market tracker fund to turn to.
Whether to protect a portfolio against a market correction, hedge risks or generate yield, Nasdaq-100 Index Options (NDX) give both retail and institutional investors the ability to stay invested in equities while reducing downside risk.
“As the options industry celebrates 50 years, it seems clear to me that we’re in a new paradigm. Average daily volumes are a testament to a much broader understanding. Options are no longer viewed as an ‘alternative.’ They have become a part of the regular lexicon for investors of all types,” said Kevin Davitt, Head of Index Options Content at Nasdaq.
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