Buying and selling quantity has elevated from the fast tempo of 2020 as retail traders step in

Traders work on the NYSE floor.

NYSE

Stock trading volumes are through the roof.

Not only share prices will hit new highs in 2021. The trading volume for stocks and options is also at a record level.

"The new year has started at a steady, unprecedentedly strong, and record-breaking pace for trading volume," said Rich Repetto, who tracks trading volume at Piper Sandler.

Much of this is being driven by retail investors who continue the high level of engagement from 2020. The increased volume brings electronic brokers such as Interactive Brokers and Charles Schwab, together with exchanges such as ICE and Nasdaq, to ​​new highs.

When will the mania of stock and options trading wear off? "Everyone said it was going to wear off, but they've been saying that for six months," said Steve Sosnick of Interactive Brokers.

The quantities are way up: is everything retail?

Inventories exploded in 2020 and increased even further in the early days of 2021:

Shares: Average daily volume

  • 2019: 7 billion
  • 2020: 10.9 billion
  • So far 2021: 14.7 billion

Source: Piper Sandler

The January volume increased by 92% year-on-year and by 33% from December.

What explains these increases? Repetto believes that the bulk of the profits can be attributed to increased retail involvement for a number of reasons:

  1. Record volume in the Trade Reporting Facility. The TRF is the "tape" that reports trades that were not made on the stock exchanges. It includes retail stores routed to market makers, as well as dark pools. The vast majority of retail stores (90%) are reported to the facility. TRF volume hit a record 48.6% of total trading that month. Repetto believes most of this can be attributed to an increase in retail.
  2. The stores with retail brokers are high up. The average daily volume of the largest e-brokers in December was 6.6 million shares, a record. In January, the average daily trade is 8.1 million, which is an increase of 23%.
  3. Options trading is high up. In December, an average of 32.7 million contracts were traded on all stock options exchanges, another record. 39.8 million contracts are traded daily in January. Repetto also cites data from Cboe showing that the market share of single contract options trading has doubled (4% to 8%) and the volume of contracts has tripled per day.

"You don't see an institution buying a contract," said Repetto.

All in all, Repetto said, and the evidence suggests retail has increased as the main driver of the overall volume surge.

What is retail purchase?

While attention is focused on big names like Tesla as the target of retail interest, Sosnick believes much of the real-world volume surge has come from obscure names at the lower end of the retail universe.

"There's a lot of volume in cheap stocks, $ 2 or $ 3 in dark stocks that have exploded in volume. That tells me people are chasing the momentum. They move because they move. People talk about them (in chat rooms) and they move you, "he said.

With regard to options trading, Sosnick notes that the same phenomenon – buying call options out of the money, which was so popular in 2020 – continues.

"There is still phenomenal interest in options, especially short-term calls," he said. "These are the options with the longest chances against the buyer because they expire so quickly, but they continue to work as long as the markets and individual stocks continue to rise."

Are there any signs that retailers are becoming more cautious? Interactive Brokers CEO Thomas Peterffy told CNBC last month that its clients were net below the market at the time.

"Our customers always make money when the markets rise and lose money when the market falls, but in the last five days it has been the other way around," he said in an interview on December 30th.

It's not clear whether this trend will continue, especially as the markets have continued to move at record levels.

"The two natural option trades are call writers (sellers) and put buyers, as this is the way to insure your portfolio," Sosnick said. "That has been turned on its head. Put-buyers are still around, but they are inundated with the people who buy calls."

When will this end? Sosnick doesn't know but is looking for signs in another very speculative company. "Although I never want to lay off private investors, there is speculation that does not seem sustainable," he said. "If I look at Bitcoin that may roll over, it's not a good sign because I think that's the cornerstone of speculative zeal."

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