Changing investor preferences and receding barriers
Market shifts since 2020 have broadened investing opportunities well beyond the wealthiest. When the pandemic forced global shutdowns, retail investors became more comfortable in general with investing, using app-based platforms from the comfort of their own homes. The increased convenience of interacting with the markets, along with additional downtime, increased their market participation. Peak daily retail flows grew from $820 million in 2019 to $1.29 billion in 2020, according to Vanda Research, which provides and tracks daily trade activity, and continued to increase in 2023, reaching $1.51 billion.
Another factor driving individual investing was the U.S. Securities and Exchange Commission’s expansion of the definition of “accredited investor” in 2020. Prior to the change, the definition was quantitative, requiring investors to meet certain income and net worth thresholds. The changes to the definition included qualitative thresholds based on professional knowledge, experience or certifications. This allowed individuals without deep pockets to participate in more sophisticated investment choices. The alternatives market wasn’t entirely closed off to individual investors pre-2020, but entry had mostly been limited to the ultrawealthy.
Fast-forward to today, and retail investors are increasingly interested in more advanced products such as derivatives, cryptocurrencies and private investments as they seek to further diversify their holdings and increase returns. The availability of more complex products in both the public and private markets is increasing with the growing demand.
Public market innovation
Retail investors are becoming more curious about derivatives, such as options, due to their flexibility and hedging capabilities. Robinhood, a popular platform for retail investors, plans to offer options products in Q4 2024 and will likely expand into futures products in the near future.
But it’s more than curiosity from retail investors fueling the interest in derivatives; the Financial Industry Regulatory Authority recently adjusted margin relief rules, which will make it easier for customers to exercise index options. Those options allow investors to overwrite long ETF positions that track the same index with cash settlements rather than underlying shares of the ETF. Through the revised margin relief rule, index options are now protected for margining purposes and are not subject to uncovered margin requirements. This frees up capital for investors to allocate to other market opportunities, allowing for further market interaction and product diversification.
The adjustment in margin requirements, the ease of liquidation and the convenience of cash settlement should further increase investor demand for both ETFs and derivatives. ETFs are already on the rise, with the number of launches per year in the United States increasing by approximately five times from 2013 to 2023, according to Bloomberg.
