By Megan Conley | Head of Operations and Course Development
Technology has enhanced market accessibility by introducing new digital methods, like mobile trading applications, for investors to execute trades. These technological enhancements have lowered the barriers to entry and a wave of new investors have entered the marketplace over the past several years. The trading behaviors of these new investors differ from what has been traditionally seen by the market, according to a report by the FINRA Investor Education Foundation.
The report found that investors are engaging in riskier investments like options, cryptocurrency and purchasing on margin. Investors are also basing their investment decisions on information obtained from a variety of social media platforms such as YouTube, Reddit and TikTok. This is in comparison to traditional investors that have historically relied on research reports and finance professionals. In addition, the motives behind investment decisions are not strictly long-term profits but also social responsibility impacts like ESG. Beyond investment decisions, the report found that new investors are scoring lower when it comes to financial literacy. While FINRA’s study relates to the securities market, similar trends have been seen in the derivatives marketplace with retail investors over recent years.
These market trends raise many important considerations with respect to market structure, risk management, regulation and compliance.
Are these new trading patterns considered unhealthy in the traditional sense or are they just different? What does the introduction of new motives and newer asset classes mean for market structure? With riskier trading behaviors, are investors prepared to take on that risk? With ease and access to markets and direct trading capabilities, what is the future role of intermediaries? How does the management of risk change? How do these new investors change how markets are regulated and how we think about compliance?
Continued analysis of market participant activity and its impact on the overall market structure will be critical in helping the industry and regulators advance the markets and manage risk, regulation and compliance. An important aspect of addressing these considerations will be thinking about how new investors today and future investors will seek information and what will be the most effective way to reach them.