Dvir Kalmy
7 min readAug 30, 2022

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Retail Investors Deserve More

In March 2020, as the world started to understand the gravity of the COVID19 pandemic, markets experienced a colossal downfall. The downfall, however, did not last for long and was eventually followed by one of the most remarkable bull runs the stock market has ever seen.

With this bull run, a significant trend began; perhaps not just a trend, but an important shift that will change how the stock market will behave in the coming decades. According to BNY Mellon, in their paper about The Rise of Retail Investors, 2021 saw almost 25% of the equity trading volume executed by retail investors. This share is up from 20% in 2020 and 10–15% in the preceding decade. A new generation of younger retail investors is purchasing equities and joining the investment universe.

2022 has been a challenging and volatile year, during which it is likely many of these newer investors, particularly the less experienced ones, will see significant drawdowns in their portfolios. According to Vanda research, the average drawdown in retail investor portfolios close to the end of this summer is 23%. It would stand to reason that this negative experience could decrease the number of retail investors participating in the market; when markets fall, hesitation increases, and retail investors tend to pull back.

The critical question is: what will this mean for the future of young retail investors? Will we lose the next generation of investors as fear keeps them on the sidelines? Or have they learned a lesson, gained a greater understanding of risk, and returned to the market ready to make more carefully calculated decisions?

I believe more people feel empowered to invest is a great thing. Investing is a vital part of building wealth when done with the correct principles and fundamental approach, and I find it encouraging to see young people wanting to take the reigns of their financial futures. The challenge is how to protect them from the disadvantages they face vis-a-vis professional investors, particularly a lack of data and advanced technological applications.

In recent years, hundreds of applications have been launched targeting retail investors, from robo-advisors to crypto trading platforms to well-designed equity trading apps.

Unfortunately, many of those applications use high gamification methodologies to get their users to trade, sometimes incentivizing unsuitable risk. Don’t get me wrong, I am a huge proponent of helping retail investors get access to the markets — I just want to make sure they are empowered to do so with every possible advantage and a clear understanding of risk.

It is incumbent upon businesses in the space — those offering applications/access to retail investors — to find a way to level the playing field. Retail investors tentatively coming back to the market after a challenging period need more from trading platforms; they need to demand tools similar to the ones used by big investment firms.

Below, I will cover a few basic tools I believe any retail investor deserves, whether it be supplied by a platform or sought out by the investor directly.

Education

Like in so many aspects of life, education, no matter in what form, is a powerful tool. There are many scholarly sources from which to learn the basic tenets of investing, and the core elements of economics have continued to be true and relevant over the years.

One big danger of the ever-increasing “content creation” economy, however, is that anyone can present him/herself as an expert and reach widespread distribution without necessarily having relevant credentials. It is important for investors to be able to distinguish trustworthy sources.

Beyond what an investor can find independently, I believe investment platforms have a responsibility to ensure their customers are educated and empowered to access investment solutions that are appropriate, as well as to ensure they properly understand risk.

Investment Applications could share education in many ways:

  • Real-time questionnaires about investment parameters, with recommendations, offered based on the answers
  • In-app educational videos
  • Experts webinars
  • Macroeconomics explained simply
  • Tips
  • Warnings before actions that go against common economic principles
A great example of education done simply are videos made available by the one and only, Ray Dalio:

Data

Investing without data is like playing football with your eyes closed. It makes no sense and will set the odds wildly against you.

Any professional investor or investing organization puts a massive amount of work into gathering, arranging, analyzing, and drawing insights from data. This is probably the most significant part of the investment process, and it is one of the greatest advantages investment organizations have over retail investors.

One of our offerings at FinityX is our Scoring solution. which makes it easier to compare stocks and find the best stocks based on data and factor analysis. This solution is inspired by the Nobel-winning Fama French function and helps investors navigate data easily.

Investment applications must find ways to engage their customers with data, from simple forms of data to alternative data and more complex insights.

They shouldn't just leave news links on each stock’s homepage but rather encourage their customers to look at this data before taking action. In an ideal world, customers should be able to look at both security-specific and high-level/macro data.

This benefits not only the investor but also the company providing the application/service.
It is intuitive to me, and an investor with more data will invest more, deposit more, and hopefully profit more often. A happy and successful customer will be a more active one.

Computing Powers and AI

In addition to having access to a great deal of data, the second significant advantage investment professionals and firms have over retail investors is computing power and AI. According to Deutsche Bank, in 2019, 90% of equity-futures trades and 80% of cash-equity trades were executed by algorithms without human input. Using AI is a clear advantage in terms of execution speed, and use of this type of technology is not new. But AI is also increasingly used to process data and draw insights. It seems obvious then, that the future of investment applications for retail investors will have to offer great AI and computing power abilities to help this sector keep growing.

Investors can benefit dramatically from using the processing power of computers and the new wave of algorithmic trading and data analytics to make investment decisions. At FinityX, our solutions are created by AI and our algorithm team, showing incredible promise, even when trading fully autonomously. We already see outstanding results with solutions like automatic hedging, predicting market state, or predicting the best performing asset over a variety of periods — day, week, or month. Our mission is to make those solutions accessible to retail investors; they deserve to benefit from this technology just like professional investors at large firms.

A backtest graph of FinityX's All Asset Predictor shows the benefit of our AI solutions. The Live results from recent months are correlated with the backtest.

Transparency

There is a great deal of discussion surrounding potentially unfair rules and questionable business models regarding applications that target retail investors.

Some organizations have been highlighted for their practice of selling order flow. I’m not opining on whether that is fair or unfair as a practice, but I do feel strongly that if it IS part of a firm’s business model, it should be extraordinarily transparent (not hidden in fine print) to the retail investors who are being impacted. Investors can then make decisions — with full information — about whether or not to participate under those rules.

I think the rule of thumb should be hardcore transparency, not just because of regulatory demands but because of relationships with one’s customers. A company should profit from its customers; of course, that’s what businesses do. Who says maximizing profit from a user can’t also involve maximizing the user’s profit?

The mathematics is simple to me: helping a user minimize loss and maximize profit leads to more activity in the application for a longer period of time. Create value for the user, and the user sees the value in your offering. Happy customer, happy business.

However, the math works for a given application/business, I am a believer in hardcore transparency. I think the new generation of investors will demand it and reward it.

To extend that transparency to this document: this article is part of our company’s effort to share our values and vision for the retail investment market. Sharing knowledge and helping others is a part of our core values, and working towards a better future for all investors is a big part of what drives us to do what we do. I've mentioned here a number of our solutions. If our vision resonates with you and you believe you can collaborate with our organization in some way, I'd love to hear from you.

I hope you enjoyed reading this.

If you like this, please feel free to look for more content from our team on our Linkedin page: FinityX LinkedIn Page

And please feel free to ask me any question and discuss those matters with me:

Dvir Kalmy on LinkedIn

  1. https://www.bnymellonwealth.com/articles/strategy/the-rise-of-retail-traders.jsp#:~:text=Retail%20investors'%20share%20of%20total,becoming%20long%2Dterm%20market%20participants.
  2. https://businessinsider.mx/meme-stocks-retail-purchases-pull-back-through-years-end-vanda-2022-8/
  3. https://www.youtube.com/watch?v=PHe0bXAIuk0

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