Kangaroos and cowboys
Most people will have heard of a ‘bull market’ or a ‘bear market’, but United States (US) business news provider CNBC added a new animal to the financial zoo earlier this year by describing the current US stock market as a ‘kangaroo market’ (due, presumably, to its bouncing up and down without any specific trend).
This unprecedented volatility has been attributed, at least in part, to the rise of investment apps and particularly zero-commission trading apps in the US. Robinhood, a particularly popular app, added a staggering 3 million users in the first quarter, while average daily trading volumes tripled. Similarly, competitors Charles Schwab, TD Ameritrade and ETrade added 1.5 million accounts (double the amount added in the previous quarter).
Although there are a number of investment apps available in the Australian market, at the time of writing this article, there are no zero-commission stock trading apps currently available. Despite this, a similar rush into the stock market by retail investors is occurring in Australia.
An analysis of markets by the Australian Securities and Investments Commission (ASIC) has revealed a substantial increase in retail activity across the securities market, as well as greater exposure to risk, during the COVID-19 pandemic period. ASIC found that trading frequency has increased rapidly, as has the number of different securities traded per day, and the duration for holding the securities has significantly decreased, suggesting an increase in short-term and ‘day-trading’ activity by retail investors.
In addition to the increased trading, there was a sharp increase in the number of new retail investors to the market, up by a factor of 3.4 times. ASIC has indicated they are also particularly concerned by the significant increase in retail investors’ trading in complex, often high-risk investment products including highly-geared exchange traded products and Contracts For Difference (CFDs).
ASIC has published a report in response to these issues which highlights a range of potential retail investor harms identified by ASIC as a result of the increased market volatility during the COVID-19 pandemic period. More recently, ASIC has also released a new regulatory guide in relation to the administration of its product intervention power. ASIC has previously used its product intervention power to ban a short-term credit product and have consulted on the proposed use of its power to address other financial products, including over-the-counter (OTC) binary options and CFDs.
Introduced as part of the Government’s response to the Financial System Inquiry, the product intervention power enables ASIC to make a product intervention order when a financial product or a credit product (or a class of such products) has resulted, will result or is likely to result in significant consumer detriment. As investment apps continue to grow in popularity, it will be interesting to see how ASIC will choose to manage these apps.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.