About a-team Marketing Services
The knowledge platform for the financial technology industry
The knowledge platform for the financial technology industry

A-Team Insight Blogs

Riding the Retail Trading Technology Revolution

Subscribe to our newsletter

Retail trading in financial markets has enjoyed remarkable growth in recent years. Retail investors were estimated to account for between one-quarter and one-third of all trading in US equities in 2021.

Among the enablers of this Retail Revolution has been the ubiquity of digital trading apps and zero-commission accounts. This has been aided by easier and cheaper access to leverage, and the power of social media websites such as Reddit, where users on the WallStreetBets forum famously triggered a widely reported ‘short squeeze’ on GameStop shares a year ago.

The Covid pandemic may have contributed to this growth, with people using their down time at home as an opportunity to start trading the markets. But regardless of whether or not the trend continues at its recent pace, retail and day traders are certainly becoming increasingly sophisticated, and are now demanding more from their trading apps than ever before.

So what are some of the considerations that established brokers and platform providers should take into account when rolling out trading apps for the retail, versus the institutional, market? And what does the future look like, in terms of retail trading technology?

A New Breed of Trader

Today, there is an abundance of trading platforms that retail investors can choose from, including those offered by large brokerage houses, such as Charles Schwab/TD Ameritrade, Fidelity Investments and E*Trade, which changed the face of retail trading a generation ago. But the past few years have seen the arrival of disruptive newcomers like Robinhood, launched in 2015 and now valued at over $10.5 billion, which have set about using sophisticated trading technologies to disrupt the original disruptors.

“All of the new entrants have an opportunity to disrupt the traditional wealth management or retail brokerage space,” says  Craig Schachter, Chief Risk Officer at Exegy, a high-performance market data and trading technology company. “And the firms that are now considered traditional companies are those like Schwab, which itself built its business as a disrupter to the big wire houses, the brick and mortar retail brokerage space. These firms – RobinHood being the largest – are bringing different types of tools to individual investors, and want to augment the trading experience for the new target customer base, including gamification.”

The incumbent retail brokerage houses are not sitting on their laurels, however. In order to compete with the new players, many are rolling out their own increasingly sophisticated trading apps, offering levels of functionality and coverage previously only available on institutional trading desks.

Research shows that many of the new breed of retail traders are young (typically under 35), relatively inexperienced in trading and investing, and more likely to rely on social media for research and trading tips than on traditional sources of macro and market data. Recognising that the excitement of retail trading is often community-driven through social platforms such as Reddit, financial institutions and brokerages are now trying to figure out how to better educate their retail customers.

“There’s a massive interest and hunger from millennials about financial markets,” says Mahmood Noorani, CEO and Co-Founder at Quant Insight, a quantitative financial market analytics and insights provider. “A lot of these people in their early 30s and younger are very interested in tech and financial markets. They’re very focused on digital entertainment and social media, they’re gamers, they’re on Discord, etc. But it’s interesting that 65 to 85% of these people lose money. It takes on average six months for a new trading account balance to go to zero.  And that’s not sustainable. So there is an enormous commercial opportunity to provide a service that could help people stop losing money by making things more visually simple.”

“With everyone working from home, there’s been a huge influx of new retail and day traders, and they are ramping up far more quickly than previous cohorts,” adds Matt Barrett, Co-Founder and CEO of trading technology specialists Adaptive Financial Consulting. “That’s led to more of a focus on training and not just trading. The new platforms that we and others are building are not just about logging in and seeing an empty watch list on day one and then expecting people to know what to do. They’re increasingly offering insights and advice, analysis, discussions, training material, videos and ‘how to’ guides, all of which are embedded in the applications themselves.”

Growing Interest in Options

From a functionality perspective, mobile trading applications are becoming increasingly sophisticated, says Jim Nevotti, President of Sterling Trading Tech, a trading platform provider. “From a trader standpoint, the apps have become so much better. The good apps now are really intuitive, they offer real engagement, so if you have a position or a watchlist and there’s some news or the market’s moving, you get alerts and can trade immediately, which for the retail space is great.”

Whereas the majority of retail activity today occurs in the stock markets, traders are increasingly looking for opportunities in other instruments.

“There are a lot more asset classes now being explored,” says Barrett. “CFDs and spread bets have always been the standard, but cryptos and options on cryptos are now being traded with far more volume than they were previously, which again means more training, guidance and help, because this stuff is complicated.”

Options trading is certainly becoming more widespread amongst retail traders. A record 9.87 billion options contracts were traded in the US last year, according to data from Options Clearing Corp, with a quarter of that trading activity occurring in the retail markets. Robinhood’s revenue from options trading in the third quarter of 2021 was $164 million, more than three times its equities trading revenue. However, the majority of retail traders are only buying basic call and put options, as more advanced strategies such as options spreads are less easy for investors to grasp.

“You’ve got a new generation of people who have become interested in active trading, so there’s this influx of real money into the system, which means there’s an immediate demand for retail brokers to provide their users with things that give them leverage,” says David Taylor, President and CTO at Exegy. “The easiest way for retail participants to get leverage is to trade options, so firms need to provide more sophisticated options data to their users. This has a very interesting knock-on effect, because options already generate 10 to 100 times higher levels of market data than other asset classes. And obviously, more interest drives more market data, so it’s a cycle.”

With their retail clients increasingly trading across multiple asset classes, brokers are having to modify their approach to risk, says Nevotti. “Many retail brokers need better and more flexible risk tools, because markets are changing and more volatile,” he says. “Instead of margining a cash account at 100% for certain assets, there may be times when they want to margin specific symbols at 300%, for example. That means changing some of the fundamental tools they use.”

Building for Scale, Performance and Reliability

To cater for the growth in retail trading, brokers and platform providers are looking at how they can utilise cloud technologies to give them the scale that they need, says Nevotti. “For retail brokers, the ability to rapidly scale is essential, because system usage by retail traders is significantly more unpredictable than institutional traders, where usage tends to be more consistent,” he says.

“If a major news event happens for example, all of a sudden you can have ten times the number of people logging into the applications, needing to be authenticated at the same time, and sending an influx of orders at the same time. That means you always have to have a buffer of excess capacity and to be able to scale your systems quickly. That’s obviously where the cloud comes in, and why everyone’s moving to the cloud, because it gives you that scale. And you’ve got the elasticity too, so you can scale up when the markets are moving and are busy, but then when the markets are quiet, you don’t want to pay for and maintain that excess capacity, so you need to be able to scale down quickly too.”

This is where there is something of a divergence between modern crypto trading platforms for example, and legacy platforms built for more traditional asset classes, many of which were designed to cater for the needs of. the institutional market.

“In the crypto space, there are lots of exchanges that are built on consumer technology on the cloud, but those platforms haven’t been engineered in a way that focuses on low latency,” says Adaptive’s Barrett. “They’re happy with the cloud because they can get a huge amount of development velocity, which is their main area of focus. Latency is less of a concern. For things that aren’t latency sensitive, we see more and more firms becoming comfortable with the idea of sending order flow to the public cloud, which is great for that last mile connectivity to mobile devices all over the globe.”

Are retail users particularly concerned about low latency when trading on mobile apps via the cloud?

“I don’t think latency is particularly important for retail clients who are prepared to operate in that environment,” says one technology vendor. “It’s an inherent risk of trading on a mobile app, if you’re on a train going through a tunnel, for example. Latency is of course imperative in so many other areas, but I’d be surprised if it was a major consideration for retail users, trading over the internet on handheld devices.”

Nevotti has a slightly different view. “Latency is important to every trader,” he says. “I’ve never met a trader who didn’t care about latency, every trader cares, but for pure retail traders, latency is not necessarily their driving factor. There are other important aspects, such as the ease of use of the technology, i.e. how easy is it to look up a symbol in whatever asset you’re trading, get a chart, get to an order screen, and how you can do that very quickly? Reliability is a big driver too.”

Taylor also believes reliability is a key factor. “Even if retail traders can’t take advantage of one microsecond versus one millisecond of latency, they do care if there’s an outage, they care if data is lost. So even retail brokers who don’t have an interest in ultra-low latency do have a keen interest in the stability of the system under stressful market conditions.”

Future Directions

So what are the key factors to consider for platform providers looking to capitalise on the growth of retail trading?

“The platforms that get it right will be the ones that manage to face off to the institutional world and make their systems easy to integrate with, as well as having a highly competitive, product driven, retail offering that can evolve very quickly in response to all the other retail platforms out there that are busily innovating and trying to capture market share,” says Barrett.

Nevotti highlights two important trends. “Instead of a bunch of different apps, we’re now moving towards a trend of ‘universal’ apps that offer trading, banking, payments, a social media component, chat, and so on. Not just trading,” he says. “The other big thing, which is being driven by crypto, is more of a shift towards ‘always on’ 24/7. The days where you only pay attention to the markets from 9:30am to 4pm are going the way of dinosaurs.”

What else is on the horizon for retail traders?

“Something that’s garnering increasing interest across the board is predictive signals,” says Taylor. “We see that as an overlay across the whole ecosystem. It’s appealing to retail traders because it’s fundamentally the same technology that sophisticated hedge funds would use. And that is particularly attractive to retail traders who buy into the mentality that they can compete with the professionals.”

With retail traders now forming such a sizeable chunk of the market, will hedge funds and other institutional investors need to better understand their activity, to factor in to their own trading models?

Quant Insight’s Noorani certainly thinks so. “The big hedge funds are definitely trying to get far more information on what retail traders are doing. So there’s a lot more sentiment analysis going on,” he says.

Subscribe to our newsletter

Related content


Recorded Webinar: The emerging structure of the institutional digital assets market

As interest in trading digital assets continues to increase among institutional investors, so too does the need to focus on market structure, regulation and trading solutions. For financial institutions that get it right the rewards will be significant, but it is not necessarily easy and the challenges are many. This webinar will consider how digital...


The Rise of Large Language Models in Financial Markets

When OpenAI introduced ChatGPT to the public in November 2022, giving users access to its large language model (LLM) through a simple human-like chatbot, it took the world by storm, reaching 100 million users within three months. By comparison, it took TikTok nine months and Instagram two and a half years to hit that milestone....


AI in Capital Markets Summit London

The AI in Capital Markets Summit will explore current and emerging trends in AI, the potential of Generative AI and LLMs and how AI can be applied for efficiencies and business value across a number of use cases, in the front and back office of financial institutions. The agenda will explore the risks and challenges of adopting AI and the foundational technologies and data management capabilities that underpin successful deployment.


Regulatory Data Handbook 2014

Welcome to the inaugural edition of the A-Team Regulatory Data Handbook. We trust you’ll find this guide a useful addition to the resources at your disposal as you navigate the maze of emerging regulations that are making ever more strenuous reporting demands on financial institutions everywhere. In putting the Handbook together, our rationale has been...