Another bout of massive stock market volatility. Another day of frustrated private investors glaring at their frozen screens like horny teenagers trying to download a low-res porn MPEG on a dial-up modem in 1994.
When markets get super congested like they did on Monday, retail platforms fall over. It doesn’t matter whether we’re in the midst of a crash like we saw back in March or if shares are going gangbusters as with this week’s vaccine rally. If you’re a private investor trying to buy or sell shares, you’ll be lucky if you can log into your broker, let alone trade.
You’d hope headlines like these would focus minds at the platforms:
- Investors rage as market surge crashes trading platforms – CityWire
- Hargreaves Lansdown suffers system outage amid record trading volumes – FT
- Retail trading hits snags as vaccine news sparks stock scramble – Reuters
But this problem is hardly new, so maybe their strategy is just to grin and bear it…
…until the next day of pandemonium rolls around.
If you’re a dedicated passive investor – good for you – then you may say “so what?” to this kerfuffle.
Passive investors don’t trade like hyperactive card sharps. Passive players buy, sell, and rebalance their holdings according to their long-term plan. Ideally they automate the whole process. They would then be oblivious to the disruption their active brethren endured earlier this week.
At Monevator, we certainly believe most such investors who use broad index funds will do better than those who try to beat the market.
They’ll also sleep better at night!
I tried to tell a friend about Monday’s market mania. My friend has learned his passive investing habits on this very website, from my passively pure co-blogger. My friend was bemused, because his portfolio just appeared to have gently risen a couple of percent since the weekend. And he’d only looked at it because I asked him to.
To prove I wasn’t an overly sensitive soul, I sent him some commentary on the market rally, such as this snippet quoted by Bloomberg:
Based on historical data, the book-to-market [factor] enjoyed a 12x standard deviation rally, while price momentum and short-term growth factors suffered from 20x and 25x sigma sell-offs, respectively, on November 9.
That’s a lot of sigmas.
Most of the indices just marched higher. But I own technology shares that fell 20-25% over Monday and Tuesday, as well as value stocks that gained that much and more.
This churn is what market wonks (guilty as charged) call ‘internal rotation’.
Partly it’s reflective of a change in sentiment among investors about the earnings outlook for different sectors.
This time around we saw ‘stay at home’ tech stocks made less appealing by the positive vaccine news, and concurrently more appetite for burned-out ‘physical economy’ firms that need boots on the ground to make money.
Yields on safe government bonds ticked higher, too. If that continues it would be bad for high-multiple shares priced on their long-term earning potential, as I explained a few years ago. At the same time certain beaten-up value shares such as banks could profit from higher rate expectations.
Yet another driver of internal rotation is when traders sell one sector as a source of funds to buy shares in another.
Even if an investor has spare cash, using it to buy the suddenly more appealing airlines, hotels, and cinema chains would mean increasing overall equity risk. Whereas selling other shares at the same time tamps down your overall exposure.
Well, it does if you’re actually able to access the market via your platform.
Going for broke
I use multiple brokers and they nearly all gave me trouble on Monday.
For a while I couldn’t even log into one. Others would let me in, but then they wouldn’t let me trade.
For example, I got into Freetrade instantly with my thumbprint and it showed me my holdings without breaking a sweat. I was all set to sing the praises of its shiny modern tech stack – until I tried to actually buy some shares. Multiple attempts left me waiting for a buy confirmation that never came – the trades were never executed.
Other brokers appeared to execute my live trades but then, after a long timeout, they admitted that really they couldn’t even get a quote from the market.
Far worse, there are reports of investors on some platforms buying more shares with phantom cash that was never deducted from their balances after earlier trades executed, and even of big negative cash balances once the dust had settled.
The platforms should have been able to uncross all this – but not without infuriating customers, and possibly dinging their potential profits.
Interactive Investor appears to have held up best among the major platforms, judging from social media. That’s interesting given it has not always received the most sparkling marks for customer service. Perhaps it’s been investing in technical capacity instead of phone lines?
Price sensitive punters
Should we care that so many platforms fell over when the market went crazy? Should we be angry customers?
I think you can be miffed about it while still acknowledging the platforms have a difficult job.
People always say that Internet-enabled businesses should be more ready for any sudden surge in demand – online grocers, video aggregators, and share platforms alike.
And of course they mostly are prepared. But what level of extraordinary extra demand is it reasonable to cater for?
You can be ready for a market that’s 10-times busier than average. But then it will be the 11-times busier market that will get you every time.
I do think these platforms are different from other sites that fail with demand surges, though. It doesn’t really matter if you order your granola from an online supermarket with a 15-minute delay. In contrast share prices change constantly, and access to those prices is exactly what you’re paying for.
You could also argue a very active stock market is clearly one that many investors want to be, by definition, given all the activity. So if a platform fails to enable you to get involved, is it even fit for purpose?
To reiterate, at Monevator we think most people should be passive investors. They should turn off their PCs and smartphones on a day like Monday and go for a walk. Try to pick short-term winners and losers during such a feeding frenzy and you’re liable to lose a limb. Or at least a few quid.
Even so, it’s not very credible to argue that a platform failing on a very busy day is protecting small investors from themselves.
You could equally well say a wine producer watering down its alcohol or a cigarette maker stuffing its fags with parsley is doing consumers a favour.
Good luck getting that past Trading Standards!
Play to play
Set against all this moaning, owning a DIY portfolio has never been cheaper or easier. Low-cost platforms are a huge reason why.
We might clamour for a quant-fund’s fat pipe plugged into a market that’s gurning like a clubber in 1980s Ibiza, but would we pay for it?
The very biggest platforms are making decent profits, so you might argue they can afford to upgrade their infrastructure.
But it’s also true that the last time the regulator looked deeply into this sector a few years ago, the rest of the platforms were making diddly-squat.
There’s been consolidation since then, so the situation may have improved. But it would be counter to investors’ interests if pressure for bombproof platforms – perhaps even from the authorities – led to more mergers, less competition, and with that higher prices. Be careful what you wish for!
Did you try to buy or sell shares earlier this week? How did you get on?