Two decades after the dotcom bubbles, day traders are back. Record volumes were seen by the likes of IG Bank or Swissborg, while Flowbank debuted with ultra-competitive fees.
As world equity markets are up more than 60% from their March lows, one phenomenon hasn’t gone unnoticed, especially in the US but also in Europe: the big comeback of retail traders, as in the old days of the dotcom bubble. We all remember the 1990s tech frenzy, when anyone, from your taxi driver to your hair dresser, would jest about the latest stock fad.
Two decades later, 2020 offers a close – but not identical - version: helped by the pandemic lockdowns and work-from-home conditions, bored wannabe-traders took to their smartphones and keyboards. The surge in FANGMAN stocks (Facebook, Amazon, Netflix, Google, Microsoft, Apple and Nvidia) gave them an opportunity to trade everyday-life stocks. Never before was trading so accessible to the layman. New trading apps pop up every day, offering almost zero commission trading.
«Transaction volumes have been much higher since March, confirms Valérie Noël, Head of Trading at the newly created Flowbank, in Geneva. The number of people registered for online trading has quadrupled in Europe», she adds. Flowbank was launched on November 25. The founder, Charles-Henri Sabet, is an online trading veteran who founded Synthesis Bank 30 years ago before it was sold to Saxo Bank. Cost competitiveness is on his radar. The platform offers very tight spreads on leveraged products and only 10 basis-point commissions for private clients, while some banks charge up to 150 basis points. But the central proposition of new banks is technology. The Flowbank app aggregates all types of underlyings: stocks, bonds, currencies, commodities, indices or private equity.
As volatility hit records, leverage is clearly in demand. Speculative instruments are popular. Derivatives such as Contracts for difference (CFD) are offered in Switzerland by Flowbank and IG Bank, and can allow investors to bet up to 200 times their assets, depending on the asset class (maximum 20 times leverage in the case of stocks, says IG Bank).
Fouad Bajjali, CEO of Zurich-based IG Bank, saw a 50% rise in the active client base over June-August 2020, versus the same period of 2019. «In March 2020, we had 1 million transactions per day worldwide, versus 300'000 in March 2019».
Cryptocurrencies have also been hitting records, with bitcoin surpassing its 2017 high. Around 68’000 new accounts were opened this year at Lausanne-based Swissborg, half of which over the last 3 months, according to Cyrus Fazel, Swissborg’s CEO. Again, technology is a key differentiator. The firm has launched a crypto-trading app fetching the best prices in nanoseconds over multiple crypto-exchanges.
«Volumes currently reach 30 million dollars a week. That is related to the rise of bitcoin, and to people having been locked down at home. Whether in shares or in cryptos, trading platforms are directly collecting those hours at home in their favor». Cyrus Fazel, an active Youtube commentator, notices that «even a Youtube live event at 8:00 a.m. in Europe, that would typically get very few views, is currently viewed hundreds of times».
He notes that in crypto trading, leverage can reach 100x and up to 1000x. «We don’t offer this kind of leverage at Swissborg, we do only physical and spot trading. The crypto market is already volatile enough. We want to do wealth management». Riding the DeFi wave that is currently booming, Swissborg will launch in December a program allowing investors to get the best yield on dollar deposits that can be found among the many crypto-exchanges. Investors receive additional returns (through tokens) if they actively trade on these exchanges. Those strategies can return more than 10%, but there are huge variations in returns.
Experts looking at the 2020 trading frenzy compare it to gambling or gaming rather than investing. Studies have shown that in a context where high frequency trading is so advanced, retail investors are bound to lose in the trading game. Imagine for instance that an HFT platform can trade in milliseconds based on an imminent bankruptcy info. By the time the average investor has heard about the news the HFT will already have closed its trade.
«It is addictive, like going to the casino», says Nicholas Hochstadter, investor and founder of Performance Watcher, a platform that compares real private client’s wealth management portfolios. «People are seeing tens of ads on YouTube telling them that someone makes 10'000 euros a day based on some trading secret, and that is the downside of apps giving too easy an access to newbies». Established players with seasoned clients see things differently: «I clearly disagree with the experts who compare day trading to video games or gambling. IG Bank, for example, focusses a lot of its efforts to provide educational content for traders to develop their strategies and trading patterns», says Fouad Bajjali.
Guidance is mostly lacking in the US market where the smallest investors are the ones who tend to be the most leveraged. «More than anything, says Nicholas Hochstadter, you need to ask yourself: given the return I earned, how much did I put at risk?». Absolute gains mean nothing, he warns, «it is your risk budget, or your risk/reward ratio, that matters».
2021 should see a normalization in volatility, absent big events like US elections or a pandemic. Valérie Noël doesn’t believe we will see the same euphoria as during the last eight months. «That being said, investors might rotate towards catch-up sectors, the ones that have suffered from the lockdown, and that would bring a new momentum to the market».
Alternatively, Flowbank’s Head of Markets anticipates that if growth comes back, central banks could put a break on liquidity expansion, which would negatively impact markets and reduce risk appetite.
Transacting apps have definitely helped trading expand and reach out to the many, and everyone can be their own trader, which is quite positive, concludes Valérie Noël, but she ends with a note of caution: «Self-discipline is absolutely key, or else volumes will collapse when there’ll be nobody left to lose money on the markets».