Following a turbulent year for retail trading, Nick Hall, co-founder at Stocknet Institute, discusses why trust, transparency and education must become the essential ground rules for a positive and innovative future for retail trading.

From FX to crypto firms, bad actors in the retail trading space have come under increasing scrutiny from regulators as of late – commonly citing, amongst other things, misappropriation of client funds, eroding trust.

In the world of retail trading, trust and transparency are of the utmost importance. When investing, retail traders are entrusting firms with their hard-earned money, in the hope that they will be able to build their wealth. We have seen many bad actors take advantage of this hope and fail to act responsibly. Now is the time for change.

The surge in retail trading

The number of active retail traders in the market has risen dramatically in recent years with 20 million new traders flooding the market during the pandemic. Increased free time, generous stimulus packages, and increased volatility were in part responsible for the rise. Even after the pandemic, the industry continues to grow, with retail traders making up 23% of market volume according to JP Morgan. 

Also behind this influx of retail investors is the availability of zero-commission trading platforms, giving traders unlimited access to a multitude of complex and risky financial products. This, mixed with the rise of “finfluencers”, online finance gurus who give financial advice to their social media following, means that retail investors are often rushed into live trading environments with a sense of false confidence, whilst being severely under-skilled – a recipe for disaster.

The critical roles of trust and transparency

For the markets to become a place where the fast-growing population of retail investors can truly thrive; trust and transparency must be cornerstones of the user experience. 

A sense of trust is the foundation upon which retail traders enter and participate in financial markets. It’s vital to build this trust to attract retail traders and encourage them to invest their hard-earned cash.

It is not just about attracting traders, however. A strong level of trust between trader and platform encourages them to stay active in the market for longer, thereby contributing to a sustainable retail trading ecosystem. This in turn creates a positive feedback loop, where a trustworthy trading environment provided by a platform attracts more participants, leading to increased liquidity and innovation in financial markets – it pays to be trusted.

So how can platforms build trust?

A good way for firms to build trust with their userbase is by being transparent. The significance of transparency cannot be overstated, as it empowers retail traders to make informed decisions and mitigate risks.

Platforms must be open and honest about how they handle and use client funds. With some recent, large scale shutdowns owing to misappropriation of client funds, this has become even more important.

They must be upfront with their fees and spreads so customers know exactly how much they’re paying for the service. 

Greater transparency must not only be provided for internal decisions, but also for external news.  Social, economic and political factors can cause large swings in markets at any time, so it is important that traders are given up-to-date information in order to best inform their trading decisions. Without this information, the likelihood of uninformed or impulsive trades due to incomplete or misleading data increases.

Risk mitigation, whilst often a discarded thought when it comes to retail trading, is an incredibly important part of trading strategy which all serious investors should implement in alignment with their risk tolerance. Again, this is partly the responsibility of their chosen platform. 

Transparent reporting and disclosure mechanisms must be in place, to enable retail traders to assess the inherent risks associated with different investment options. Clear information about a financial product’s risks allows traders to align their risk tolerance with these investment choices, fostering a more sustainable trading environment.

Empowering through education

While platforms offering ‘live’ trading accounts are popular, they’re not always the best way for investors to start their trading journey. Many people jump straight into the live markets without being properly equipped with the knowledge and skill needed to trade successfully and are equally unaware of the consequences this lack of foundational skill can bring. Instead of being thrust straight into these live markets, retail traders of all levels and disciplines should develop their skills in a low-risk, non-live environment.

The gamification is one way the market is starting to offer this. It includes virtual challenges and skill games, allowing users to trial and implement different styles, strategies and asset types without exposure to live markets. This can be a very useful gateway to support novice traders on their journey to becoming skilled veterans.

A 2022 retail investor survey conducted by BNY Mellon and The World Economic Forum found that over three-quarters of current retail traders would likely invest more if they had more opportunities to learn about investing – that is an incredibly large untapped and under-supported community. 

The future of the retail trading industry doesn’t have to be fraught with doom headlines and horror stories of life savings being lost overnight – and so it shouldn’t be. Trust and transparency, as well as increased education, are key to a successful future for retail investing.

The positive feedback loop is real and beneficial for all. If platforms ensure best practice, hold each other accountable and ground rules are successfully laid, then we can shape a future that prioritises the retail trader.