The corporate watchdog has expressed concern that retail investors could be playing with fire as the number of newcomers entering the market during the volatile period has more than tripled while trading activity has spiked.
The findings have been published in ASIC market surveillance data around retail trading and investors from the first trading day following the market peak, 24 February to 3 April.
The number of new retail investors entering the market, as signalled by the rate of creation for new accounts, had shot up by 3.4 times.
ASIC reported an average of 4,675 new unique client identifiers (indicative of new client accounts) that appeared per day from 24 February – making for a total of 140,241 identifiers not previously observed.
During the period, new accounts represented 21.36 per cent of all active accounts, spiking from the six months before when new accounts had accounted for 3.65 per cent of all active accounts.
A large number of “dormant” client identifiers from retail brokers, which had not traded during the preceding six months, started trading again in the February to April period, making up 21.63 per cent of all active accounts.
Meanwhile the average daily securities market turnover by retail brokers surged from $1.6 billion for the six months leading up to 21 February, to $3.3 billion from 24 February to 3 April.
Retail trading as a proportion of total trading had increased marginally from 10.62 per cent to 11.88 per cent, when benchmarked against the total average daily securities market turnover – which increased from $15 billion to $28 billion.
Retail investors had also traded more frequently – ASIC noted that there was a substantial decline in the average time between trades by the same investor in a particular stock. In the preceding six months, the average had been 4.5 days but during the February to April period, the average time was one day.
Investors were either building up positions more frequently over time or attempting to profit from buying and selling around short-term price movements, ASIC said.
For trading in any stock, the average time between trades by the same investor had decreased from two and a half days to less than one day.
But the average retail investor was reported to be not proficient at predicting short-term market movements.
For more than two-thirds of the days on which retail investors were net buyers, their share prices declined over the next day. For more than half of the days on which retail investors were net sellers, their share prices increased over the next day.
If all retail investors held their positions for only one day, ASIC said, total losses would have amounted to more than $230 million.
“Even market professionals find it hard to ‘time’ the market in a turbulent environment, and the risk of significant losses is a regular challenge,” ASIC said.
“For retail investors to attempt the same is particularly dangerous, and likely to lead to heavy losses – losses that could not happen at a worse time for many families.
“The higher probability and impact of unpredictable news and events in offshore markets overnight only [magnify] the danger.”
ETPs posing risk
The average daily turnover in exchange-traded products (ETPs), including ETFs and managed funds, increased by 159 per cent from $703 million in the preceding six-month benchmark period to $1.88 billion in the February to April period.
In contrast turnover had risen by 86 per cent across the broader securities market over the same time period.
However the proportion of turnover in ETPs that retail brokers were a party to increased marginally, from 58 per cent to 61 per cent. ASIC noted a significant proportion of non-retail activity in the products is typically conducted by market markers as opposed to institutional investors.
There was a significant increase in trading activity in ETPs with geared exposures in the same or opposite direction to market movements. One geared ETP had its trading volumes increase by 16 per cent the normal volume to become the second-most traded ETP, with retail investors on at least one side of 75 per cent of turnover in the fund during the February to April focus period.
ASIC has warned that retail investors who do no understand the complexity of geared ETPs or do not have the appetite for their associated risk shouldn’t trade the product.
“Gearing magnifies the risk of these ETPs, by increasing profits from favourable market movements but also increasing losses from unfavourable market movements,” the regulator’s report stated.
“Additionally, geared ETPs are complex because they are actively managed to periodically reset the level of gearing, to ensure that it remains within a specified range after large market movements.”
Contracts for difference (CFDs), a highly geared exchange-traded product, saw a significant increase in retail investor trading, to ASIC’s dismay.
In the week of 16-22 March, retail clients’ net losses from trading CFDs were $234 million for a sample of 12 CFD providers.
Further, ASIC noted price volatility throughout ETPs and other unlisted managed investment schemes that are exposed to oil futures. Some products were reported to see price declines greater than 80 per cent during the 24 February to 22 April period.
Listed investment companies and trusts were also affected – the price of some fell by 50 per cent during ASIC’s focus period.
Overall, ASIC noted an increasing proportion of LICs and LITs trading at greater discounts to their net tangible assets, a trend that predated the pandemic.
Trading volume also spikes for REITs – as prices and total market capitalisations fell.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].