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CBOE's Catherine Clay, Josh Brown And More Pros Unpack The Rise In Retail Trading

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Renato Capelj
·3 min read
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During the Benzinga Global Fintech Awards, a day of dealmaking, networking and recognition in the financial technology space, Benzinga founder and CEO Jason Raznick presented the following discussion on the rise of retail investing and its impact on market structure.

Dealers Chasing Deltas

Coronavirus pandemic lockdowns prompted millions who were searching for new forms of engagement to fuel a new rise in retail trading activity. The impact of this activity is widely believed to have changed the dynamics of modern market structure.

That’s according to Catherine Clay, senior vice president at Cboe Global Markets Inc (BATS: CBOE), who said retail trading activity has become dominated by smaller orders on one side of the market.

“Some firms only allow clients to buy options,” she said Tuesday.

“When you’re putting more buy orders into the marketplace, the other side of that trade is obviously selling those contracts, so the dealers and liquidity providers are taking more short positions, and so some of these augmented market moves up and down may be a reflection of those dealers having short gamma positions.”

In the simplest way, when a market is in short-gamma territory, liquidity providers are forced to sell into weakness and buy into strength, thereby exacerbating volatility.

“There is some evidence that the options market is somewhat of the tail wagging the equities market dog,” Clay said. 

Execution Is Paramount

In a later conversation regarding retail order flow, Joshua Brown of the Reformed Broker spoke about the implications of algorithmic trading in markets.

“These moves are quicker than ever,” he said. “It’s computers trading against computers.”

Brown suggests retail investors are incapable of creating the volatility markets are realizing.

Instead, as speaker Tim Quast of ModernIR suggested, a very minimal amount of retail money actually ends up in the market due to intermediation by market makers. Instead, you have to “recognize that over half of the volume is coming from somebody that hopes to game your trade.”

Quast suggested that traders should vary their approach depending on volatility and time.

“If you’re going to be a successful trader, you have to recognize there are different purposes and time horizons, and one of those is trying to game your trade.”

Traders can take advantage of volatility by working their orders for better pricing.

“In the S&P 500, the average component moves 4% every day,” Quast said. “So, if my aim is to get a 3% return over about 7 days, ... then the difference between the price I get now and the price two minutes from now could be 3% versus 2%, a 50% difference.”

Traders can improve their probabilities by trading in less than 100-share increments, he said. 

“A registered market maker is required to quote a minimum 100 share increments, so trades that are less than that are very likely to be price improved, because it is the law.”

Engagement Is A Positive

In a final discussion on retail engagement, Michael Batnick of Ritholtz Wealth Management suggested that increased trading among younger traders is a long-term positive.

“Investing is a means to an end,” he said. “The sooner people get started, the better off they will eventually become.”

Profits and losses are only one component of trading, Batnick said. Instead, the emergence of social trading is increasing awareness and narrowing the wealth gap, allowing newer generations to begin building wealth sooner, he said. 

“At the micro-level, this is good for young people.” 

To participate in future recognitions of disruptive innovation in financial services or learn more about this particular discussion, please visit bzawards.com. Complete results for the Benzinga Fintech Awards, including company profiles and an interactive database can be found here.

Photo courtesy of Robinhood. 

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