Bringing Cboe's U.S. Retail Playbook Abroad

If you’re anything like me, 2020 feels like it was only yesterday. It wasn’t long ago that we shut down our offices, businesses and even the Cboe^® trading floor – retreating to our homes, then re-emerging to a world forever changed. In reality, it’s been four years since the start of the COVID-19 pandemic, which also marks four years since the unprecedented rise of the retail trader.

Retail trading had been on the rise when the sudden move to fully-remote work for most people in 2020 ushered in a major shift in the U.S. market landscape as even more new retail traders flocked to the market. Enabled by an array of mobile-first brokers offering low or $0 commissions and stimulus payments, and emboldened by online communities that flourished while people were stuck inside. There was plenty to catch new traders’ eyes: “meme stocks” gained national attention, oil prices went negative, and uncertainty about COVID’s impact led to plenty of opportunities for new entrants to develop opinions and engage in two-sided markets. It is not surprising that these events drew in new market participants. A FINRA survey found that 38% of U.S. investors who opened a taxable brokerage account in 2020 had never held a taxable brokerage account before. Moreover, 22% of those new investors were between the ages of 18 and 29 and 66% were under 45 years old. 

What does this tell us? As we live through the largest wealth transfer in modern history ($70 trillion in assets by 2042!), the next generation is investing their assets — but they want to do it differently than the people who came before them. These investors want to actively manage their own investments and protect their assets, often making decisions rooted in their own value system. This is transforming our markets, and we believe it’s only the beginning of a shift that will have a lasting impact. We’ve embraced this shift and will continue to build trusted markets that are accessible to everyone, from legacy institutions to first-time retail traders.

Many market pundits dismissed the influx of retail trading as a pandemic-era trend, sure to wane as the world reopened, but four years later, the retail segment continues to actively engage in markets and with even more sophistication. The early phase of the retail boom was dominated by options on single stocks. Today, we’re seeing retail traders increasingly participate in the index and ETF options space. In last year’s record overall volumes for the U.S. listed options industry, single stock options were flat, and it was ETF and index options that raised the volume bar, hitting 12% and 33% year-over-year growth, respectively. Much of the index options growth was in short-dated options (0DTE) trading, notably 0DTE SPX options trading. Based on proprietary exchange data¹, we estimate that roughly 30-40% of all flow in 0DTE SPX options trading comes from individual retail traders, just one indicator of their increasing sophistication.

The same pundits also claimed that retail traders were only interested in the markets to “get rich quick,” but the data shows this is generally not the case. At Cboe, we have seen the growth in U.S. retail trading first-hand, and we believe most end investors are serious about building wealth and investing for the long term. They have become an important part of the market ecosystem, adding liquidity and seeking new ways to increase their participation.

We expect this to continue and have created products and education to better serve this type of investor for years to come. As the retail segment has grown, Cboe has been focused on creating toolkits for every account size. We launched mini-SPX, mini-RUT and mini-VIX Index derivatives to enable retail investors to leverage the utility of index products in an accessible vehicle. We added more short-dated expirations, offered Retail Priority on our EDGX^® equities exchange and backed it all up with best-in-class education from the Options Institute.

Our goal is to increase participation and deliver education around these and other risk management tools, to better ensure that retail traders can confidently ride out the inevitable waves of the market. We know the market’s performance never takes the form of a straight line. It’s important for retail investors to incorporate sound risk management strategies to protect their assets.

This seismic shift in market dynamics has been exciting for the exchange industry. In many ways, we were building as we went, figuring out how to best serve so many new entrants to the market. And it worked. Retail investors continue to participate in our markets and generate demand for innovative new products that better serve their needs. Now, we have a U.S. retail playbook that can be ported to markets across the world with similar effects. 

Retail participation is a positive for all participants, and we believe this trend will continue to expand into other jurisdictions around the world. Europe, where retail trading has not been as popular, is starting to see real growth, with retail trading in the region expected to grow substantially in the next five years. And the environment is ripe for growth. The same expansion of mobile-enabled fintech brokers that we experienced in the U.S. is happening in Europe. U.S. imports have made their way across the pond and domestically grown entities are gaining traction as well. The long-established brokers are similarly looking beyond the immensely competitive U.S. market. Interactive Brokers recently said that two-thirds of its new accounts originate from Europe or Asia Pacific. Importantly, the zero-fee trading that helped drive retail growth initially has become a mainstay of these platforms, continuing to provide an incredibly low—or no—barrier to entry. 

Global investors want exposure and access to deeply liquid U.S. markets and these brokers are creating inroads to U.S. markets, enabling cross-border transaction activity. To foster and realize this growth, however, ongoing product innovation and education will be paramount. In Europe, the retail base historically has not been as focused on exchange-traded instruments as it is on over-the-counter dealers in the FX and CFD space. Leveraging the knowledge we’ve gained from the retail segment in the U.S., we’ll help current and prospective retail traders in Europe become more familiar with exchange-traded products and the benefits they offer – from the elimination of counterparty risk via clearinghouses to the potential capital efficiencies on hand. 

The situation in Asia Pacific is similar to Europe, although more appetite for derivatives already exists in APAC. According to the Futures Industry Association, futures and options trading in APAC increased 104% from 2022 to 2023, with retail being a significant driver of that growth. Overall, this is still a burgeoning market that we’ll continue to help grow. 

There are additional factors that could provide more tailwinds globally, as well. If the IPO market recovers, that will likely lead to more retail interest in markets. Changes in volatility, rule changes that enable greater accessibility, upcoming elections and current events all can encourage new entrants to the market and spur increased activity from existing participants. 

This would not be the first time a shift in the U.S. market has sparked a transformation in global markets. Be it derivatives trading, index investing or exchange traded funds (ETFs), the U.S. is often the first mover in our global industry, identifying new opportunities that eventually take hold worldwide. 

The evidence is clear: U.S. retail investors are becoming more sophisticated, building their trading acumen and successfully deploying strategies that go beyond entry level trading, and it is only a matter of time until global markets resemble what exists there today. Growth in the U.S. until now has been exceptional, and the word is out, but there is much of the total addressable market globally that is untapped

As the Exchange for the World Stage, Cboe is committed to providing access to robust, reliable and liquid markets to people worldwide—especially retail participants who have not always been given that same access. It may seem that an increase in retail participation only benefits those investors, but everyone stands to benefit from this growth. More participants leads to more liquidity, more liquidity leads to better spreads. Not to mention, welcoming new retail participants to the market enables them to build their own sustainable financial future and improve their financial literacy, which creates a whole other sequence of economic benefits — that is an article for another time. 

There is no denying that the retail base is growing rapidly. We are harnessing that opportunity by providing new products, services, education and industry partnerships that give both novice and experienced traders the tools they need to effectively participate in our markets. We are eager to meet these investors where they are and excited to welcome them to our markets.

^{The information provided is for general education and information purposes only. No statement provided should be construed as a recommendation to buy or sell a security, future, financial instrument, investment fund, or other investment product (collectively, a “financial product”), or to provide investment advice. There are important risks associated with transacting in any of the Cboe Company products or any of the digital assets discussed here. Before engaging in any transactions in those products or digital assets, it is important for market participants to carefully review the disclosures and disclaimers contained at: https://www.cboe.com/us_disclaimers/. © 2024 Cboe Exchange, Inc. All Rights Reserved.}