From the desk of Steve Strazza @Sstrazza
Lots of charts are being shared showing the exponential growth in trading activity, new accounts, and anything else that might paint a story of euphoria at retail and discount brokerages since the pandemic broke out.
Here is some personal background only to provide context for what I’m about to discuss.
I live on an island. It is tiny, about 4 square miles. In fact, I live on an obscure island just above Key West which is technically much smaller than that. As a “Census Designated Place” it’s really just a collection of roads and canals, a village of about 4,400 people.
It’s nice, but it comes at the cost of an economy that relies almost entirely on Tourism. The people who live here are more or less fishermen or workers at the many hotels, bars, and restaurants in what’s generally a booming downtown area. Since shutting down our borders months ago, the local unemployment rate has spiked to an estimated 50%.
Before becoming a Technician and moving down here, I used to work as an auditor for some of the largest Broker-Dealers on Wall Street. I worked on areas of financial and regulatory reports that most people will luckily never hear of. Riveting concepts like bucketing financial instruments by their liquidity, and valuation techniques and recalculating net capital, and customer segregation requirements for FINRA.
Another one of those areas was Daily Average Revenue Trades or “DARTs.” Brokers use this to measure the average number of revenue-generating trades per day.
Have you seen these charts lately?
Sentiment Trader shared this on Twitter the other day and there have been plenty others like it floating around social media and financial news outlets.
Many are pointing out the significant rise in activity at Robinhood, which in my opinion is even more meaningless than what’s going on at retail brokers like E-Trade, TD and Schwab.
When I say this is meaningless I am not being insensitive. I think it’s great more retail investors are getting involved in the market, I hope they picked the bottom. But that’s not what I’m talking about.
What I mean is that this has little to no impact on the price behavior of large and mega-cap stocks that drive the market, which is what really matters.
Further, it is likely of little significance even as a sentiment measure considering we’re living through a period of time with more people at home with nothing to do and no way to make money than ever before in history… Not to mention the new ease of use and low fee structures of many brokers… What’s that make the sample size on this?
Also of importance, but aside from the point I’m trying to make, is that this increased activity is even worthless for the brokers. Don’t go out buying their stock based on increasing DARTs. Ten years ago this was one of the metrics these stocks would move on, but their revenue model was very different then.
Remember commissions? They don’t exist anymore. This means the “Revenue” or “R” in DARTs is now basically zero, rendering the statistic useless from a profitability standpoint.
I am no expert these days but from my understanding many brokers have redefined the way they calculate DARTs to adapt to the new world of zero-fee trading. So in many cases, you’re not even comparing apples-to-apples data in these charts.
But there is definitely no denying that there has been a huge ramp-up in trading activity. I have had more friends/family members come to me in the past two months asking for help with opening a brokerage account than ever before. Some are furloughed, some laid off, some still working but from home, one even owns a food truck here on the island. Some old, some young, some live down here, others back up in CT and NY. There is no trend, they’re all doing it.
Now add the number who have asked questions about their IRA, from increasing contributions to reviewing their allocations, and I’ve personally witnessed an abrupt rise in the level of attention people are paying to investing and their savings in general.
We can pose a thousand obvious reasons WHY this might be, but I want to focus instead on WHAT it means for markets.
Two quick stories…
My friend from Key West worked two jobs in the hospitality industry. She was laid off from one but has continued to work at the other. She came over about a month ago so I could walk her through opening an account. She was very anxious to do it. She told me many of her friends were buying Carnival Cruise and Delta Airlines and telling stories of great promise and profit (remember, these people work in the industry and it is only human to invest in what you’re familiar with!). They told her to use Robinhood too.
We opened her an IRA on Schwab instead and bought some Treasuries and Johnson & Johnson stock. The market value of the account is three figures.
People who have been laid off and are now unemployed or underemployed are still opening accounts. From my experience, it’s not because they have extra money but because they finally have some extra time to focus on these things.
My cousin who is married with kids and has been largely unaffected economically by this crisis recently asked me to help her with her 401(k). Basic questions that people should ask all the time but rarely ever do.
We reallocated some things, rolled an old 401(k) into an IRA, and increased her contributions.
My friend and cousin’s actions are not going to have any impact on price, but they are going to be reflected as an increase in DARTs, trading activity, new accounts, etc.
Don’t get me wrong, I also have friends who put some decent size to work in the markets. I’m sure most of you reading this do too. They always have though, it’s not like the pandemic has caused them to have extra money to invest right now.
Instead of trading larger, they are just trading more frequently. This type of change in behavior is also reflected as an increase in trading activity, DARTs, etc.
What drives markets higher is not just the existence of more buyers than sellers. It’s that the buyers are currently putting more capital into the market than sellers are taking out of it.
It’s all about the SIZE of these players.
And the players driving this huge increase in trading activity are in a completely different league than the ones trading enough size to matter.
In other words, the collective buying of all our friends and family members who have taken up this new interest in markets is not powerful enough to offset all the selling Warren Buffett has been doing.
Whoever is doing it though has a lot of capital, and that is NOT reflected in charts of DARTs.
Luckily we can always see the activity of these major players through price, so we’ll continue to focus our attention there.
How are you interpreting this data? Let us know what you think.