Changing face of the retail investor

Retail investing has gained a new following in the UK over the last 18 months as many thousands of people opened investment accounts for the first time.

Dr Robert Barnes is Group Head of Securities Trading & CEO Turquoise Global Holdings, LSEG

The demographic of today’s retail investor in the UK is also changing with the average age of someone opening a new account falling from 54 in 2012 to 37 today.

The trend appears to have staying power too. A poll by Barclays found that the average UK investor plans to invest 19 per cent more cash each month post-lockdown, rising to 36 per cent more for younger, Gen-Z investors.

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This boom has rightly thrown the spotlight back onto financial education as younger investors turn to a new generation of digital brokers to trade everything from stocks, bonds and exchange traded funds (ETFs), to more complex asset classes like derivatives and cryptocurrency, which often come with a higher risk profile. Building financial literacy can have an important impact, from the savings we can build for our pensions, to funding our entrepreneurial dreams.

But there is a wide range of important topics to get to grips with. Let’s take the lifecycle of a trade. Consider, for example, if you wanted to buy shares in Vodafone, a UK listed company.

Many retail stockbrokers who are buying and selling shares on behalf of their customers will conduct their client’s business ‘off book’. This means your Vodafone trade will be reported after the stockbroker has directed your order bilaterally with a market maker that actively provides bids and offers for this trade. This is a legitimate mechanism but different from the use of a central order book provided via a trading venue, such as an exchange.

Central order books gather a group of buyers and sellers, directly contributing to the price-discovery process and interacting with multilateral orders available in the pool. This offers a ‘liquid’ market on a level playing field in which to buy or sell shares.

These order-books also offer investors the ability to remain anonymous, both before and after the trade, protecting their identity and trading strategies from being revealed. In this instance an algorithm matches buy and sell orders within the price limits provided. Once matched, the exchange sends information of the confirmed trade back to both counterparties, who will then pass this information back to the end client.

At the same time, the venue also passes the details of the trade to the relevant clearing house, which ensures that the buyer or seller aren’t left out of pocket if the other fails to meet their obligations to transfer cash or stocks to the appropriate account. Two days after the trade was executed, settlement occurs. This is the process where the buyer receives the stocks and the seller receives the cash, completing the trade lifecycle.

A customer of a bilateral trading mechanism may benefit from immediacy of execution and potential price improvement compared to waiting in the queue at the best bid or offer of an order book. A customer with an order in the multilateral trading venue has the opportunity to interact with the widest addressable pool of orders from multiple buyers and sellers.

Despite the complexity of financial markets, UK retail investors are empowered with choice like never before. Today’s new entrants of entrepreneurial online brokers are offering electronic order books, faster, simple payments through Open Banking and access for their customers to the same innovations and visualisations designed and used in wholesale markets.

A new generation of UK investor can avail themselves of the most modern trading tools plus financial education in order to make informed decisions to generate long-term, sustainable investment returns.