Retail investors warned of share day-trading danger

‘Mum and dad’ investors are ramping up risky, speculative bets on shares, prompting ASIC to warn of big losses in volatile markets.

ASIC says retail investors are attempting strategies risky even for hardened professionals. Photo: iStock

A wild ride on the sharemarket caused by the coronavirus pandemic is seeing retail investors ramp up their bets on equities and volatile options products, while a feverish level of daytrading by inexperienced traders could see households lose tens of millions of dollars at a time the economy slides into a recession.

Corporate regulator the Australian Securities & Investments Commission has over the past month conducted research into trading patterns, including monitoring the activity of brokers favoured by mum and dad investors and the springing to life of previously inactive broker accounts, to warn of the dangers of playing the market.

Individual investors, perhaps many of them stuck at home and day-trading on their laptops, could be trying to time the market and trade in and out of positions, potentially racking up losses at a time the economy looks to be lurching into a recession and when families need to hold on to as much cash as possible.

And the personal losses are racking up. ASIC found that in the week of March 16-22 retail clients’ net losses from trading contracts for a difference (CFDs) mounted to $234m in a sample of 12 CFD providers.

ASIC said on Wednesday its analysis of markets during the COVID-19 period had revealed a “substantial increase in retail activity” across the securities market, as well as “greater exposure to risk”.

“We found that some retail investors are engaging in short-term trading strategies unsuccessfully attempting to time price trends,’’ the regulator warned.

ASIC found that trading frequency had increased rapidly, as had the number of different securities traded per day, and the duration for holding the securities had significantly decreased: indicating a concerning increase in short-term and day-trading activity.

“Even market professionals find it hard to ‘time’ the market in a turbulent environment, and the risk of significant losses is a regular challenge. 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.”

Market data uncovered by ASIC pointed to a strong leap in buying and selling by retail investors during March. The average daily securities market turnover by retail brokers increased from $1.6bn in the benchmark period to $3.3bn in the focus period.

ASIC said retail trading as a proportion of total trading increased marginally, from 10.62 per cent to 11.88 per cent, when benchmarked against the backdrop of total average daily securities market turnover, which increased from $15bn to $28bn. Retail brokers were net buyers of securities over the focus period, buying $53.4bn and selling $48.4bn.

ASIC said retail investors, the name typically given to non-institutional investors or professionals and also known as ‘mum and dad investors’, chasing quick profits by playing the market over the short term have traditionally performed poorly — in good times and bad — even in relatively stable, less volatile market conditions.

“The analysis suggested few pursuing quick windfalls were successful. During the focus period, on more than two thirds of the days on which retail investors were net buyers, their share prices declined the following day. On days where retail investors were net sellers, their share prices more likely increased the next day.”

In addition to the increased trading, there was a sharp increase in the number of new retail investors to the market — up by a factor of 3.4 times — as well as a marked increase in the number of reactivated dormant accounts.

The higher probability and impact of unpredictable news and events in offshore markets overnight only magnifies the danger, ASIC said.

“ASIC is therefore particularly concerned by the significant increase in retail investors’ trading in complex, often high-risk investment products. These include highly-geared exchange traded products, but also CFDs.

“Trading activity in CFDs has increased significantly during this period of heightened volatility. Leverage inherent in CFDs magnifies investment exposure and sensitivity to market volatility, so retail clients should be particularly cautious about investing in leveraged products at this time.”

ASIC noted that in fast-moving markets, prices can gap and losses can exceed the initial investment, causing a ballooning of CFD losses.

“Many retail client accounts went into negative balance in the week commencing 16 March. 5,448 retail client accounts of the 12 providers in the sample (or 2 per cent of their retail client accounts that traded during that week) went into negative balance to the value of over $4 million in aggregate.”

The flood of Australians onto the market has also fuelled a sharp rise in the use of orders that remain open until cancelled, also known as “good til cancelled” or GTC, which is adding to the potential large losses racked up by smaller investors as sudden swings in the market see their orders executed without notice.

“GTC orders provide the benefit of order queue priority and the possibility of orders away from current market prices being hit if there are overnight price moves. But they are exposed to significant price swings in response to overnight international news and market performance, and may expose retail investors to unexpected losses,’’ ASIC said.