Traders work on the NYSE floor.
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 stock and options trading craze subside? “Everyone said it was going to wear off, but they’ve been saying that for six months,” Interactive Brokers’ Steve Sosnick told me.
The volume is high: is it all retail?
Inventories exploded in 2020 and increased even further in the early days of 2021:
Shares: Average daily volume
- 2019: 7.0 billion
- 2020: 10.9 billion
- So far 2021: 14.7 billion
Source: Piper Sandler
The January volume has increased by 92% compared to the previous year. Compared to December, the volume has increased by 33%.
What makes these profits? Repetto believes that the bulk of profits can be attributed to increased retail involvement for several reasons:
1) There is a record volume in the Trade Reporting Facility (TRF). 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 TRF. TRF volume reached 48.6% of total trading that month, a record. Repetto believes most of this can be attributed to an increase in retail.
2) Stores with retail brokers are high up. The average daily volume of the largest e-brokers in December 2020 was 6.6 million shares, a record. In January, the average trades were 8.1 million, an increase of 23%.
3) Stock options trading is high up. In December, an average of 32.7 million contracts were traded on all stock options exchanges, another record. In January, 39.8 million contracts are traded per day so far. 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 tripled per day.
“You don’t see an institution buying a contract,” Repetto told me.
All together, says Repetto, and the evidence suggests that increased retailing is the main culprit for the overall increase in volume.
While attention is focused on big names like Tesla as a 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 that people chase the momentum. They move because they move. People start, to talk about them [in chat rooms] and they move, “he said.
With regard to options trading, Sosnick notes that the same phenomenon – buying the money call options so popular in 2020 – continues.
“There’s still a phenomenal interest in options, especially short-term calls,” he told me. “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? Thomas Peterffy, CEO of Interactive Brokers, said in an interview on CNBC on December 30th that its customers were net below the market at the time.
“Our clients always make money when the market goes up and lose money when the market goes down, but for the past five days it has been the other way around,” he said.
However, it is not clear if this trend continued into 2021, especially as markets continued to move at record levels.
“The two natural option trades are call writers [sellers] and buyers because that’s the way to insure your portfolio, “Sosnick told me.” That was turned upside down. Put buyers still exist, but they are inundated with the people who buy calls. “
When will this end? Sosnick doesn’t know, but is looking for signs of another very speculative venture: “Although I never want to dismiss private investors, there is speculation that doesn’t seem sustainable. When I look at Bitcoin that may be rolling over, that’s not a good sign because I think the bell for speculative fervor. “
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