Wall Street Veteran Says Amateur Traders Dampen Stock Volatility

(Bloomberg) -- The soaring popularity of stock trading by the wider American public during the pandemic has actually been helpful for the functioning of the market more broadly, according to one veteran trader.

The involvement of amateur investors means less volatility and fewer irregular trading episodes, said Larry Peruzzi, Boston-based director of international trading at Mischler Financial Group Inc., who's been buying and selling equities for a living for more than two decades.

He pointed to the decline in the Cboe Volatility Index, or VIX, from highs in the mid-80s in March to the mid-20s currently, even as trading volumes on U.S. exchanges have been elevated in the past few months compared with recent history.

“Coupled with the decline in volatility, it's the best scenario that we would want,” said Peruzzi. He added that retail investing “tends to be spread throughout the day” -- as opposed to institutions that often trade near the beginning and end of the day -- and that “we are seeing less irregular trading dips and spikes.”

Greater levels of participation from amateur investors helped propel the rebound in U.S. equities since March, said Julian Emanuel, head of equity and derivatives strategy at BTIG LLC in New York.

Charles Schwab & Co. saw 1.65 million new brokerage accounts open in this category in the second quarter, a four-fold increase on the same period last year. E*trade Financial Corp. this month said its $31.9 billion of retail inflows in 2020 was occurring at a “blistering pace.”

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“We still have some concerns that once interest rates and inflation rise or discretionary income falls, will retail investors cash out?” said Peruzzi. “That may very well happen in the future but currently the rise in retail investing has been a welcome phenomenon.”

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