There has been a large increase in retail trading in US equity markets this year as markets gyrated amid the Covid-19 pandemic and investors had more time to trade while they stayed at home. Nasdaq hosted a webinar, The Evolution of Retail Investing and Related Obligations, to discuss the opportunities and risks presented by this increase in retail activity.

Retail trading volumes this year have jumped to 25% of the total market in the US, up from 10% last year, according to John Zecca, executive vice president and global chief legal and regulatory officer at Nasdaq. He continued that many novice investors have started trading as shown by the 170% increase in new accounts opened by online brokerages in the first quarter this year.

Phil Mackintosh, chief economist at Nasdaq, said retail investors have favoured ETFs, micro-cap stocks and brand name large-cap shares. “Where there has been an increase in retail activity, there has been an increase in liquidity,” he added.

Joe “JJ” Kinahan, managing director and chief strategist at broker TD Ameritrade, welcomed the increase in retail participation which he described as amazing. “There is an untold story in the increased use of education as the average person is trying to do right thing,” he said.

Kinahan particularly welcomed the increase in trading from millennials. “We need to take advantage of millennials coming to the industry,” he said. “They trade in different ways but we should be encouraging them and encouraging their market education.”

He noted that most firms have done a good job in updating their risk management systems so retail traders can trade from many devices, including mobile phones.

“We can show them how their margin is calculated and be as transparent as possible,” Kinahan added. “We offer lots of education on ETFs and can show them the top holdings so they understand what they are buying.”

Ken Bentsen, chief executive of trade organisation SIFMA, noted that the increase in retail trading was due to a confluence of factors which had started before the onset of the pandemic.

“Markets have become more democratized, technology has reduced the cost of trading and cash that had been on the sidelines has come into the market,” he added. “This trend will continue and education and advice will be important.”

Bentsen highlighted that advice is subject to regulatory mandates. He said: “Registered broker-dealers are also under a lot of duties and obligations around protecting investors.”

Gerri Walsh, senior vice president of investor education at FINRA, said the regulator had carried out a survey and found that the increase in interest came from retail investors earning more than $60k, who had confidence in the fairness of markets and were younger. There was a decrease in interest from retail investors aged between 45 and 59.

“Retail investors do not always expect to make money but 40% expect a recovery in the next one to three years,” she added. “The survey also found that women were less likely to be invested.”

Walsh continued that Finra had strict rules for registered firms and individuals on education and communications with the public.

Lori Schock, head of office of investor education and advocacy at the Securities and Exchange Commission, said the regulator was focused on protecting investors from fraud, making sure they are aware of fees and understand the risks.

“The barriers to entry to trade are lower but the SEC wants to ensure that investors are educated and avoid fraud,” she added. “We are glad millennials are engaged in the market but we want them to be as safe as possible.”

Kinahan noted that social media can have a huge influence on retail trading, especially on millennials. “Reddit is the new generation’s CNBC and social media can be a great tool for understanding the market,” he added. “Unfortunately there will always be some bad actors who seek to take advantage of people, so we need education.”

Mackintosh noted that retail investors have also used options in order to trade high-priced stocks, which has been shown in the increase in volumes of single stock options and smaller sized contracts.

Kinahan said retail investors use options as they are good at capital management. “Using options allows them to buy shares without using a huge share of their account,” he explained. “They have to understand the risks for different types of trading.”