By Francesca Benincasa and Loris Buscaino – Market Hub, IMI Corporate & Investment Banking Division, Intesa Sanpaolo.
In recent years, the macroeconomic landscape has significantly influenced investor sentiment, characterised by various risks and tensions in financial markets. Key factors include rising inflationary pressures linked to the Covid-19 pandemic and increasing interest rates from global central banks. However, these were not the sole contributors to market volatility. Persistent geopolitical tensions have also affected the economic growth of major world powers, resulting in production slowdowns due to escalating energy and raw material costs and supply chain disruptions. Such developments have heightened uncertainty among market participants.
The rise of retail investors
In this dynamic context, retail investors have enhanced their market presence, continuing the upward trend that had an acceleration around four years ago with the pandemic’s onset. Despite a slowdown in growth, retail flow maintained a significant role in financial markets throughout 2023. In the early months of the year, US retail investors accounted for about 15% of total US equity market volume, trading around $1.5bn daily1. The bond market similarly benefited from small investor participation, generating an average daily notional value of $1.1tn and approximately a 20% increase from 20222. US Treasury securities saw an 11% increase, with an average daily volume of $760bn, while corporate bonds rose by 20%, with an average daily volume of $42.5bn3.
The rise in volatility, the movement of high-growth tech stocks and interest in innovative digital assets have stimulated retail investor participation in financial markets, with a particular focus on alternative assets. Despite the reduced enthusiasm for the cryptocurrency market compared to previous years, many retail investors still consider Bitcoin, Ethereum, and other digital currencies as investment opportunities. This trend became evident in 2020, when low-cost trading services and easy access to multi-asset online platforms allowed small investors to pursue profit opportunities.
Market dynamics and the impact of cost-free models
The proliferation of “zero-commission” trading models has attracted an increasing number of clients. This trend has initiated a market-wide reduction in both direct costs, such as trading fees, and indirect costs associated with trading. Additionally, the increased participation of investors has enhanced market liquidity by tightening bid-ask spreads, improving order execution, and minimising price impact.
This growing order flow has also raised concerns about the Payment for Order Flow (PFOF) model in Europe. This practice risks directing orders toward market makers offering higher rebates rather than ensuring best execution. In 2021, the US platform Robinhood experienced a significant surge in retail investment flows. This culminated in notable trading events, such as those surrounding GameStop and AMC, where volumes skyrocketed, driven by social media and online forums.
Regulatory developments in the retail investment landscape
The activities of retail investors on platforms like Robinhood drew the attention of the media and regulatory authorities. Such events prompted regulators to closely monitor trading behaviours, raising concerns about execution quality and market distortions. The MiFID II directive has improved transparency regarding costs and the quality of financial services, offering retail investors clearer access to detailed information. Responding to these issues, the European Securities and Markets Authority (ESMA) recently banned the practice of PFOF in Europe, marking a significant step toward enhancing investor protection.
In May 2023, the European Commission announced the Retail Investment Strategy (RIS) as part of the Capital Markets Union action package. This initiative amends the regulatory framework with measures designed to guide small investors toward more informed choices, providing greater information about investment processes and the associated risks and benefits of financial instruments. By promoting products like Exchange Traded Products (ETPs), the RIS encourages market access and includes mechanisms to protect retail investors from deceptive practices and high-risk investments.
These developments have contributed to significant growth in the retail business. Brokers have adapted to increasing flows by enhancing digital platforms, refining commission structures to suit clients, and providing educational tools. In Italy, this adaptation has been supported by the extensive experience of financial intermediaries in the B2B2C segment, collaborating with commercial banks, private banking, and online trading to respond to recent market demands more rapidly and effectively.
The growth of investing in stocks, ETFs and bonds
Stock exchanges have also introduced new operational features. For instance, in 2023, Euronext revamped the Global Equity Market (GEM), allowing the trading of a diverse range of European and US stocks in euros (over 350 securities). Companies like Apple and Microsoft have driven stable demand and increased investor enthusiasm, supported by their success in cloud services and artificial intelligence. Analysis of equity securities indicates a strong presence of tech stocks in retail investors’ portfolios. Due to profit opportunities, stocks like Tesla, Amazon and Nvidia have also attracted substantial interest. These stocks are now consistently among the Top 5 most traded US equities by retail investors in 20234.
The Exchange Traded Funds (ETF) market has also experienced significant growth. The rise of innovative execution methods, such as fractional share trading, has enabled small investors to access products that would otherwise be prohibitively expensive. Thanks to an increasingly wide range of products offered by major asset managers, investors have been able to diversify their portfolios more easily. In 2023, retail investors traded approximately $600bn in ETFs and an average daily volume of $1.51bn5. Interest in fixed income ETFs also surged, with $332bn traded annually, benefiting from favourable interest rates and increased liquidity. This trend has continued into 2024. Similarly, interest in ETFs on indices, technology, and actively managed commodities remains high, with a total of $640bn traded annually6.
The bond market has attracted investors seeking stability as well as those interested in opportunities presented by declining bond prices. The emergence of Retail Aggregators has enhanced market liquidity and continuous pricing in order books. Market data reveals increased investments in shorter-duration bonds and government securities to mitigate interest rate risk from central bank interventions. The Italian Ministry of Treasury’s direct placement of BTP bonds has become a notable case in recent years. The initial direct placement of BTP Italia on March 19th 2012, marked a turning point for small investors, enabling online purchases through the Mercato Telematico delle Obbligazioni (MOT) platform. Since then, the Treasury has repeatedly utilised this placement method with remarkable results, as demonstrated by the two BTP Valore issuances in 2023, maturing in June 20277 and October 20288, each raising over €17bn. With step-up coupons and a loyalty bonus at maturity, small investors are incentivised to hold the bonds in their portfolios until redemption, pushing the price above par on the secondary market.
Future outlook for retail Investors
Looking ahead, the participation of small investors in financial markets appears set to grow even further. Economic prospects suggest a steady increase in order flow, fostered by a more integrated relationship between retail investors and brokers. A trading environment that is increasingly accessible, new investment opportunities, more advanced trading platforms, greater transparency in transactions, and regulations aimed at protecting investors could make the impact of retail order size flow increasingly significant in financial markets. As this landscape evolves, understanding the dynamics of retail order flow will be essential for all market participants.
1. Pallavi Rao, “Charted: US Retail Investor Inflows (2014–2023)”, Charted: US Retail Investor Inflows (2014–2023) (visualcapitalist.com), Nov 2023.
2. Raphael Stern, “Why fixed income ETFs in the current macro environment? “
www.invesco.com/apac/en/institutional/insights/etf/why-fixed-income-etfs-in-the-current-macro-environment.html , Oct 2024.
3. Katie Kolchin, “Fixed Income Market Structure Compendium”, www.sifma.org/resources/research/insights-fixed-income-market-structure-compendium , Apr 2024.
4. Data analysis based on internal information provided by Intesa Sanpaolo SpA.
5. Natan Ponieman, “Retail Investing Peaks In 2023: How Small-Time Trading Matured From Meme Stock Frenzy“ markets.businessinsider.com/news/etf/retail-investing-peaks-in-2023-how-small-time-trading-matured-from-meme-stock-frenzy-1032894724, Dec 2023.
6. BlackRock’s iShares division “BlackRock reports record fixed income inflows in 2023 global ETP market” funds-europe.com/blackrock-reports-record-fixed-income-inflows-in-2023-global-etp-market, Jan 2024.
7. MEF Ministero dell’Economia e delle Finanze – www.dt.mef.gov.it/it/news_debito_pubblico/2023/btp_valore_09062023.html#:~:text=BTP%20Valore%2C%20che%20ha%20data,il%201%C2%B0%20giugno%20scorso, Jun 2023.
8. MEF Ministero dell’Economia e delle Finanze – www.dt.mef.gov.it/it/news/2023/risultati_BTP_valore.html, Oct 2023.
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