Retail investors are being asked to take heed of a warning by the Australian Securities and Investments Commission (ASIC) that trying to profit from COVID-19-induced market volatility is a risky game.
The corporate watchdog has today released an analytical paper on retail investor trading during the recent coronavirus outbreak, revealing a “substantial” increase in retail activity across the securities market, as well as “greater exposure to risk”.
“We found that some retail investors are engaging in short-term trading strategies unsuccessfully attempting to time price trends,” ASIC stated.
Increase in new client accounts
According to ASIC trade surveillance data, over 3.4 times more new retail investors entered the market than the comparative period; there was also a marked increase in the number of reactivated dormant accounts.
“An average of 4,675 new unique client identifiers [indicative of new client accounts] appeared per day in the focus period [24 February to 3 April]. This made up a total of 140,241 identifiers we had previously not observed,” the regulator reported.
“In the benchmark period [22 August 2019 to 21 February 2020], we observed 1,369 new identifiers per day and an average of 34,502 new identifiers appearing in a period of the same length.”
Rise in short-term trading activity
Trading frequency increased rapidly, along with the number of different securities traded per day, while the duration for holding the securities has significantly decreased, indicating an increase in short-term or day-trading activity.
“Even market professionals find it hard to time the market in a turbulent environment, and the risk of significant losses is a regular challenge. For retail investors to attempt the same is particularly dangerous, and likely to lead to heavy losses – losses that could not happen at a worse time for many families,” ASIC warned.
“Retail investors chasing quick profits by playing the market over the short term have traditionally performed poorly – in good times and bad – even in relatively stable, less volatile environments,” it said.
The report showed that during the focus period (24 February to 3 April), more than two-thirds of the days on which retail investors were net buyers, their share prices declined the following day.
On days where retail investors were net sellers, their share prices more likely increased the next day.
Unprecedented times magnify the danger
ASIC said the higher probability and impact of unpredictable news and events in offshore markets overnight “only magnifies the danger”.
The commission is particularly concerned by the significant increase in retail investors’ trading in complex, often high-risk investment products, such as highly-geared exchange traded products and contracts for difference (CFDs).
“Leverage inherent in CFDs magnifies investment exposure and sensitivity to market volatility, so retail clients should be particularly cautious about investing in leveraged products at this time,” ASIC said.
It used an example from mid-March, when retail client net losses from trading CFDs amounted to $234 million for a sample of 12 Australian licenced CFD providers.
The 12 providers account for about 84% of market share, so the aggregate retail client losses across the industry for this single week (16-22 March) may be higher, ASIC stated.