Access Drives Engagement: Why the Trading Landscape Has Changed
The stock market is both timeless and ever-changing, which makes it a curious paradox.
On the one hand, markets look, feel, and behave exactly the same today as they did 100 years ago, or even two millennia ago.
We can read stories of a bull market mania or market panic from the early 1900s, or the 17th and 18th centuries, or even dating all the way back to Roman times — in 2020 we wrote about the Roman Financial Crisis of 33 A.D. — and it feels like nothing has changed.
Across eras, cultures, and even millennia, tales of boom and bust have the same characteristics because human nature, and the basic drivers of human behavior, haven’t truly changed in all that time.
That is why The Psychology of the Stock Market, written by G.C. Selden and published in 1912, has an opening paragraph that sounds like it was written for today (with the rest of the text the same):
“Most experienced professional traders in the stock market will readily admit that the minor fluctuations, amounting to perhaps five or ten dollars a share in the active speculative issues, are chiefly psychological. They result from varying attitudes of the public mind, or, more strictly, from the mental attitudes of those persons who are interested in the market at the time…”
And yet, according to Heraclitus, a man can never step in the same river twice. This is true of markets, too: No market era is ever the same as the last one. Market history can echo, or rhyme, but never truly repeat, in the same manner no human individual could repeat a prior year of their life.
In this respect, the market is constant because the market is always changing. This is where technology comes into play, because sometimes technology can profoundly shift the market landscape.
Take the long journey of stock market commissions, from high and fixed all the way down to zero.
The New York Stock Exchange (NYSE) was founded in 1792. For a whopping 183 years, from the founding of the NYSE until 1975, trading commissions had a fixed rate. Any member who did business at less than the fixed-rate commission risked being kicked off the NYSE.
But then, on May 1, 1975 — known as “May Day” in Wall Street history — fixed-rate commissions were abolished, allowing price-based competition to take hold. After nearly two centuries, brokers could change what they charged.
Forty-four years later, in 2019, trading commissions dropped to zero. This was possible because of technology: The true cost of execution had fallen below the benefit of holding a customer’s cash balance and routing their orders to a market maker. “Cheap” no longer cut it; the new benchmark was free.
The introduction of zero-commission-trading was powerful because of the impact it had on psychology. There is something different about paying a price of zero. The mental jump from paying a small amount to paying nothing at all — or the appearance of such anyway — was more like a large psychological leap.
Along with zero-commission trading, the introduction of fractional-share trading removed a large amount of friction from the marketplace.
It used to be that, if a retail investor with a small account balance wanted to buy an expensive stock — expensive in terms of the share price, that is — they were simply out of luck. It is hard to buy, say, AMZN above $3,000 per share if the balance in one’s account is less than $2,000.
But with fractional-share access, the share price doesn’t matter anymore. The same thing goes for the king of all cryptocurrencies, Bitcoin: Even though BTC/USD trades north of $30,000 per coin, the average investor can buy $5 worth if they want.
Robinhood, the investing app now broiled in controversy, claims it wants to “democratize” investing for the masses. But the real democratizing force is technology, in the way it removes friction, and grants ease of access, to investors who never had such access before.
Zero-commission trading and fractional-share buying are two big access drivers and friction removers. A third is the ability to trade via smartphone, or to otherwise hop on a laptop and place an order almost instantly.
The typical smartphone user has their smartphone within arm’s reach 24 hours per day. When they brush their teeth, it is there near the sink; when they go to sleep, it sits on the nightstand by the bed. That means trading access is now just an arm’s reach away, too.
A fourth driver of access, and friction removal, is easy-to-use interface configurations for OTPs (online trading platforms) and the ability to set up automatic investing behaviors with a few clicks of the mouse (or swipes on a phone screen).
Say a small investor wants to allocate a modest $20 per month — roughly the cost of a large pizza — to their three favorite companies: Tesla, Square, and Peloton. A recurring allocation can be set up in minutes. An algorithm takes care of the rest, and auto-executes the buys via fractional shares.
The fifth and sixth drivers for access and friction removal are message boards and online information sources. Through Reddit and various social media channels — like the financial versions of Twitter and TikTok, dubbed FinTwit and FinTok respectively — we have already seen how online investors can get together and try to bull raid their favorite meme stock.
Then, too, with online information sources, technology has made quality information increasingly cheap to access — or even free — which gives investors the ability to draw on analysis, and software tools, that would have cost tens of thousands of dollars just 10 or 20 years ago.
All of these elements have come together to radically shift the trading landscape.
After the GameStop squeeze, and the $12.5 billion dollar Melvin Capital taking a reported 53% loss in January 2021, it is doubtful that hedge funds will ever again dismiss the risks of being squeezed in a stock with more than 100% float sold short.
But the change is more profound than that because retail investors, as a group, are a larger force in markets now than they have ever been before.
This isn’t just due to a market mania, or the aftermath of a “bored in lockdown” period (though both of those factors apply). It is also the manner in which access increases engagement, and the removal of friction increases activity.
All told, it has become easier than ever for the retail masses to participate now, and they will almost certainly stick around.
The technology-driven democratization of markets (which is a far bigger thing than just Robinhood) is excellent news for those who have talent and drive but were previously shut out of Wall Street; those individuals will no longer need Wall Street.
And because trading and investing is a zero-sum game — in the sense that fewer than half of participants can beat the benchmark — this shift will simultaneously be bad news for the Wall Street players who relied more on connections than talent, and who, having seen the access barriers tumble, are at risk of getting routed by the new players on the field.