Congressional oversight of the nation’s securities markets takes center stage today with a hearing on GameStop’s frantic stock trading over the past weeks. The high-profile hearing offers legislators and regulators an opportunity to broadly evaluate the state of equity market structure and how the mechanics of the markets serves investors. The hearing comes amid technological innovation of automated, low-cost trading that is democratizing access to investing, juxtaposed with recent Tik Tok, Reddit and other social media gamification.
Although the markets are functioning more cost-effectively and efficiently than ever, even during COVID-19 volatility, three market structure trends are worth discussing:
1) Democratization of markets and the rise of the retail investor. At present about half of Americans are invested in the stock market through a multitude of savings vehicles, including 529 college saving plans, 401(k) plans, IRAs, pension funds and ABLE plans. Retail investor participation trended upward over the past year, with individual investors comprising up to a quarter of market share, up from the 10 to 15 percent typical baseline in years prior. Indeed, trading volume surged over the past year, with daily volume of trades increasing to $11 billion in 2020, up from $7 billion the previous year. With GameStop interest from new or younger investors on Tik Tok, Reddit and social media, there presents an opportunity for financial education on the capital markets to harness the enthusiasm for trading and educate beyond gamification to long-term investing. One may be hopeful that participation of retail investors may continue to broaden, including more women and minorities, to participate in the long-term upside of investing in the markets, helping to pay off student loans, save for retirement or other life goals.
2) Technology has fueled low-cost trading, narrowing bid-ask spreads and saving investors money. Automated trading technology has driven down the cost of trading over the past decades, with bid-ask spreads narrowing, and the cost of a $100 trade reduced from $6 before electronification of the markets, to zero commission now thanks to electronic intermediaries. Technological innovation has fueled the move to zero-commission trading with platforms such as TD Ameritrade, Fidelity, Robinhood and Charles Schwab, with trading technology offering new efficiencies and dramatic reductions in transaction costs to investors large and small. Now, investors can trade for free from a cell phone or tablet, anywhere, any time. Seemingly small savings in trading add up to large numbers over time, especially with investors of ETFs and mutual funds which are continuously rebalanced, with investors having 30 percent more in their bank accounts over lifetime investing as a result of the low-cost automated trading technology.
3) Need for transparency. Although the cost of trading has gone down to zero or near-zero, the vital provision of liquidity in today’s modern markets is low-cost but not totally free. There are still costs for the provision of liquidity. Different liquidity providers — e.g., exchanges and an increasing share of alternative trading systems and dark pools — compete for order flow and use pricing mechanisms including “payment for order flow,” “rebates,” or other business models to incent flow onto different venues. Online brokerages should be proud of how their business models work, and explain to retail investors their payment structure, and what price improvements are delivered, within the overall business model that has driven down the cost of trading to pennies on the dollar. Congress should invite further transparency from industry participants on emerging technology trends, such as the gravitation to more than half of trading off exchange, its impact on market quality and the integrity of the “displayed quote” to build confidence in the capital markets for investors.
Congress has an opportunity to ensure the further democratization of our nation’s securities markets, so that they continue to function more cost-effectively and efficiently than ever, and continue to be healthy, modern and transparent.
Kirsten Wegner is the CEO of the Modern Markets Initiative, an education and advocacy organization for innovation in today’s financial markets.
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