There has been a lot of attention the last few years on the rise of retail trading. The meme stock craze highlighted the power of this community to express a forceful point of view in the markets. Retail participants, especially Gen Z, are the driving force behind cryptocurrencies and their promise. Even the futures markets have shown an increase in retail participation, especially in micro-sized contracts. The Commodity Futures Trading Commission estimates that retail trading volume in futures contracts on US exchange now averages about 50% higher than during the pre-pandemic period.
To get a better grip on this trend, FIA invited several member firms with expertise on retail trading to a roundtable discussion in Chicago on 16 February. Our aim was to discuss the growing participation from this segment and to understand whether the industry and its regulations are properly situated to support this growth. The forum included a range of participants from major exchanges to upstart ones, from traditional brokers to crypto firms, and from lawyers to regulators.
I cannot overstate the value of this roundtable. In fact, I came away with a different view than coming into it.
First, I had underestimated the size of the wave and its lasting impact on our markets. Retail participation may ebb and flow, but what I learned from the roundtable is that the underlying growth trend is structural, not cyclical. Better technology and lower commissions are a big reason for that trend, but more importantly, there seems to be a generational shift in customer behavior. The Millennials, Gen Z and now Gen Alpha aren’t satisfied with owning index funds and the classic “buy and hold” strategies. They want to be more directly engaged with markets and they are seeking out brokers that offer the best tools for their trading. They may be young, but this trading segment is here to stay.
Second, my background is a regulatory one, and my first exposure to retail participation in derivatives markets was at the CFTC combatting retail fraud and abuse—mostly in highly leveraged off-exchange foreign currency contracts. This had always left a sour taste in my mouth. Fortunately, that fraud has been largely wiped out over the years, thanks to Congress, the CFTC and the National Futures Association. But surely there must be an increase of retail fraud with this growth in their participation?
Last week I learned some interesting facts about this point:
- While retail participation is at record highs over the last 3 years, customer complaints and single-event customer arbitrations filed at NFA, as well as CFTC reparation cases, remain near all-time lows
- Many of these retail brokers have sophisticated controls that prevent retail participants from blowing out their positions
- Brokers, exchanges, and infrastructure providers are committed to educating retail investors to make them informed participants in our markets
These last two points make sense when talking to retail-focused brokers. They want to develop long-term relationships with customers and that requires education and nurturing. In their mind, the “retail” user of today may become the professional trader or “protail” user of tomorrow. It is in the business interest of brokers to protect these users from large losses and develop these traders over time.
Another interesting takeaway from the roundtable was the lack of a consistent definition of a retail investor – and that’s ok. Some noted that commercial hedgers are sometimes less sophisticated than some of these “protail” traders. Instead of trying to decide who is retail and who is institutional, our roundtable recommended focusing on providing the best possible experience and protections to all users of the market. That includes a new generation of active traders who already have experience trading stocks and now want to add futures and options to their portfolio.
In the background of last week’s discussions was the recent collapse of FTX and the resulting loss of customer funds for many crypto market participants. But it is important to highlight that those losses took place outside of the regulatory purview of the CFTC and NFA. This is a key reason many of these firms are seeking the protections of the CFTC regulatory structure for the proven customer protections that exist today for all users of exchange-traded derivatives. And I applaud CFTC Chair Russ Behnam’s recent announcement to review the protections to ensure they remain fit for purpose.
The rise in retail market participation provides us with a tremendous opportunity to educate a new generation of market participants about both the benefits and the risks of trading futures and options. I’m excited to learn more from FIA members that work every day to meet their customers’ needs, and to work with our members, regulators, and policymakers to protect customers, promote responsible innovation, and preserve market integrity.
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