Mom and Pop step up their trading
Discount brokers are seeing big jumps in business as small investors get back into the game.
Small investors are putting a little high frequency into their own trading.
TD Ameritrade posted a 30 percent jump to a record 492,000 revenue-generating trades a day, while E*Trade said average daily volume rose 33 percent to 198,000. Charles Schwab (SCHW) last week reported a 13 percent increase in volume to 337,300 trades a day.
Executives attributed the growth to strong returns from stocks in recent years, more widespread adoption of mobile-trading technology and the lack of alternatives to stocks in a period of historically low interest rates. More market volatility during the first quarter added to trading volume, executives said.
Broader stock-market volume has been sluggish, suggesting ordinary people are accounting for an increasing percentage of overall stock-market activity.
While professional money managers have little choice but to trade stocks, individuals are more fickle. Many individual investors were burned badly by the financial crisis, and another steep selloff could stop the trading resurgence in its tracks.
But the bull market that began in March 2009 entered its sixth year during the first quarter, helping to lure back investors who had sworn off stocks -- and enticing newcomers seeking profits. Trading increased despite a choppy market during which the S&P 500-stock index eked out a 1.3 percent gain for the quarter after logging a 9.9 percent rise in the last three months of 2013.
The increase in trading "is broad-based," said TD Ameritrade Chief Executive Fred Tomczyk. "It's everywhere. It's very robust retail engagement."
The increase in retail activity started in the fourth quarter of last year and picked up steam in the first quarter.
Gabe Mercer, a 22-year-old student who is taking a semester off to develop a mobile application, said he "stumbled" onto the stock market in March while reading Twitter and watching YouTube videos.
"It seems like a great time to be in the market," he said. Mercer, who lives in Mooresville, N.C., said he has invested $500 via a TD Ameritrade account. He has made a handful of trades so far, he said, and hopes to become a full-time trader one day.
While market volume tends to rise over time, it was down 35 percent in 2013 from a peak of 1.947 trillion shares reached in 2009.
By one measure, small investors now comprise a bigger slice of the pie. Average daily trading volumes at E*Trade, TD Ameritrade and Schwab rose by an average of 18.9 percent in the quarter from the final three months of 2013, more than the 8.7 percent rise in overall stock-market volume.
People are "looking for return somehow," said David Levy, chairman of Jerome Levy Forecasting Center LLC in Mount Kisco, N.Y. "Until they get scared" they will be in the stock market, he said.
A spokeswoman for TD Ameritrade said trading activity was up by double digits in each client segment, which included longer-term investors and active traders -- those making more than 30 trades a quarter.
Thomas Peterffy, CEO of Interactive Brokers Group Inc., another discount brokerage, said his firm also is seeing more trading from all segments, including active traders, longer-term investors and financial advisers who trade stocks on behalf of clients.
While some brokerages are reporting record volumes now, the numbers can be deceiving. After a marked expansion during the market boom of the 1990s, the industry consolidated and contracted sharply.
But in one respect, brokerage clients are trading more than they did in the previous bull market that ended in 2007. TD Ameritrade said its so-called activity rate, a measure of the average number of trades a day divided by the number of accounts with money in them, was 8.1%, the highest level since 2004.
Margin loan balances also rose broadly in the first quarter. When investors trade on margin, they borrow against their accounts to buy more securities.
Interactive Brokers, which reported a 25 percent jump in client trades in the first quarter, said margin loan balances rose 30 percent from last year. Margin balances increased 22 percent at E*Trade, 16 percent at Schwab and 15 percent at TD Ameritrade. The S&P 500 jumped 19 percent in the past year.
Derrick Leon, an investor in Colorado Springs, Colo., said he boosted the leverage in his brokerage account in mid-February. He now has close to $500,000 in "buying power," he says, up from $300,000. "If you have the right positioning and you know the stock is going in your favor, you can add more [leverage], and it means a bigger profit margin," he said, adding that he expects to borrow even more in the future.
Mobile technology is a big driver of trading activity. At E*Trade, mobile represented 11 percent of trades in the quarter, up from 7 percent a year earlier. At TD Ameritrade, mobile technology accounted for 13 percent of daily average trades in the first quarter, up from 8.3 percent a year earlier.
Some investors remain on the sidelines. Ray Giese, a 59-year-old pharmaceutical salesman in Chicago who co-founded an investing club, said he has held off on adding to the stocks in his portfolio.
"You need to be a lot more selective when everyone's optimistic and euphoric," he said. "You have to be a little more cautious."
He said he is waiting for the "euphoria" to pass. "People think they have to do something, when in fact sometimes the better thing to do is nothing."
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