Retail investors pulled away from the market this month, even though April is usually a seasonally strong month because earnings reports drive trade activity. This drop in trade volume could reflect a more cautious mood from individual investors who dove into the market at the beginning of the year and in many cases got burnt by corrections over the last quarter.

“Retail trading activity slowed in April from the torrid pace to start the year with TD Ameritrade Holding Corp. (NYSE:AMTD) and E TRADE Financial Corporation (NASDAQ:ETFC) reporting that DARTs were running down 4% and 10% m/m respectively through April 23,” writes BMO Capital Markets analyst David J. Chiaverini in an April 30 report. “Our private broker contacts have confirmed that this lower level has carried through month-end.”

Retail trading: DARTS still up 20% over last year

Despite being down between 5% and 10% month on month, daily average revenue trades (DARTs) are still up around 20% year on year based on Chiaverini’s channel checks with private brokers. DARTs usually decelerate in May and June after the April peak in activity, and he expects to see volumes fall another 11% sequentially, but that would still be a 9% increase over 2Q13. The disconnect between earnings and trade volumes also implies that there could be a larger number of new, unsophisticated investors in the market so the May and June might not see their usual drop either.

Chiaverini estimates that US cash equity volume was down 4% month on month in April falling to 6.6 billion shares traded per day, but was still up 4% year on year. Options trade volume was up 2% month on month and 3% year on year to 17.3 million contracts per day. The discrepancy between shares and options trade volumes could be because newer traders are both more likely to get spooked by a more difficult market and less likely to have been trading options in the first place.

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Charles Schwab still rated Outperform

Despite the industry slowdown in April, Chiaverini rates Charles Schwab Corp (NYSE:SCHW) Outperform, arguing that in addition to being a sector leader with strong recurring revenues, it is leveraged to rising interest rates but that its current valuation doesn’t take that into account. He also likes the long-term potential of Charles Schwab’s index-based 401(k) products. Chiavereini rates TD Ameritrade Holding Corp. (NYSE:AMTD) and E TRADE Financial Corporation (NASDAQ:ETFC) as Market Perform, both of which he likes but says that they have limited short-term upside.

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