3 Ways to Revolutionize Retail Trading

There are no champions looking out for the retail trader. This reality holds true even considering the seemingly favorable developments to empower retail traders over the years. The 1980s witnessed the emergence of discount brokers, enabling everyday traders to trade stocks at affordable commission rates. Technological advancements in online trading further drove down commission costs. By 2019, major discount brokers even eliminated commissions on many equity trades. Sounds like a fair deal for retail traders, right?

Not exactly. Trading has become a game within a game – a race to the bottom where the middleman requires less and less on surface-level transaction costs while finding more creative ways to take money from retail traders. Many retail traders believe the stock market is a dignified place where supply meets demand. That is simply not true today, and probably never was.

Retail traders must realize the trading game is a façade, not the dignified professional market that institutional investors and academics claim it to be. If retail traders fail to get out of this tunnel vision trap, they’ll continue to play a losing game – one that the big whales have dominated for decades.

For retail traders to have a fighting chance in increasingly murky markets, the game must be revolutionized. Traders must receive the financial services and fiduciary care guaranteed to them under the law. They deserve a level playing field when competing with large institutions, full transparency about the costs of trading, and confidence that new technologies will work to their benefit. And traders must empower themselves by foregoing any widespread conventional wisdom about markets.

Here are a few key steps required to begin the trading revolution.

1. Empower Retail Traders with Superior Technology

Retail traders find themselves at a disadvantage to institutional traders. Institutional investors have access to cutting-edge technology that retail investors lack. Institutions employ sophisticated strategies that benefit from low network latency to capture arbitrage opportunities and mitigate risk for their firms (while risks to individuals remain). To level the playing field, retail traders must be able to access similar technological advancements, empowering them to employ sophisticated, high-frequency trading strategies and enhance their risk controls. By granting retail traders access to these technologies, several benefits can be realized. Increased participation in high-frequency equity trading can lead to more efficient markets and better price discovery. Narrower bid-ask spreads can translate into cost savings for individual traders and foster greater market liquidity.

One area where retail traders can particularly benefit from superior technology is data analysis visualization platforms like BigShort.com. As high-frequency traders and algorithms drive price movements, some traditional retail trading strategies may become obsolete. Access to advanced data analysis tools can empower retail traders to adapt to the changing market dynamics, identify new opportunities, and make better informed trading decisions.

In fact, modern visualization tools that facilitate pattern recognition can still give retail traders an edge over artificial intelligence. Historical data analysis, combined with user-friendly visualization interfaces, has been crucial in helping humans make sense of the vast amounts of incoming data in financial markets, ever since the development of Japanese Candlestick charting in the 1800s.

Empowering retail traders with superior technology is not about replacing human decision-making with automation, but about augmenting their capabilities with valuable insights and tools. When retail traders can harness a new technology’s potential, they stand a better chance of navigating complex markets effectively and seizing opportunities that were once only accessible to institutional traders. The democratization of sophisticated technology will usher in a new era where traders can compete, and positive outcomes are the norm.

2. Regulatory Modernization for a Rapidly Evolving Market

The US securities regulation framework is considered the gold standard and historically supported the most transparent, fair, and efficient markets in the world; however, in many ways, it has become outdated.

A recent and troubling example of where the US regulators have fallen short is reflected in their permission of Payment for Order Flow (PFOF), an agreement in which a broker receives payment from a wholesaler for sending trade orders to that wholesaler for execution. This process limits competition, meaning while you, the trader, may not pay an upfront commission, you may pay a higher price to buy a security or receive a lower price when you sell than you would if the order was fulfilled in a competitive market. PFOF is a practice that Robinhood has become notorious for, as it is a way for the fintech broker to generate revenue while offering “commission-free” trades. What PFOF has done, however, is obscure the true costs of trading for retail traders. The SEC and FINRA have failed retail traders by allowing this practice.

The stock exchanges have engaged in a similar practice, issuing order rebates for institutional traders who route trades to the exchange. While the exchanges argue that this practice encourages trades to occur publicly, increasing market transparency and price discovery, the practice of order rebates delays execution of orders, allowing high frequency trading (HFT) algorithms to buy up shares in front of waiting retail orders, then sell them at small profit back to the retail traders. This cuts into a retail trader’s profit. And, the exchange’s “transparency” excuse doesn’t hold much water, considering that dark pools, off-exchange trades, and otherwise unreportable or delayed-reported trades still remain a problem, reducing market transparency.

Finally, regulations must take on problems of HFT algorithms directly. Front-running retail trades is illegal in many contexts but remains permissible in the instance of HFT algorithms. HFT algorithms present excess risk. With the nano-second speed in which they execute trades, the HFT algorithms, if incorrectly programmed or facing unique market circumstances, can bring markets to a halt and cause billions in losses.

The SEC has not kept up with the sleight-of-hand techniques that emerging fintech firms, established financial giants, and stock exchanges have employed to capture a piece of the retail trader’s account balance and returns. Regulators could help reform trading for the benefit of retail clients by ensuring that retail traders receive the same prices, rebates, and execution as institutional investors, while ensuring that bad actors and risky strategies are thrown out of the trading world.

3. Dispel the Myth of an Orderly Market

Trading is often portrayed as a fair game where winners and losers form a normal distribution of results over time. It is not.

Trading is a cross between a casino and a street fight. It’s like a casino in that the house always holds an edge, but similar to a street fight because the rules are always changing and players evolve to prey on each other. Being a good trader relies on constantly adapting to changing conditions and the intellectual curiosity to understand market dynamics beneath the facade of what is presented by the financial media.

It’s important to understand that the prices quoted on the public markets are very often fake prices. Understanding why this is the case and how to take advantage of it is part of the journey of learning to be a profitable trader. Once traders accept the notion that any widely held belief has already been arbitraged away and can no longer be leveraged for profit, and they begin challenging commonly held assumptions to gain an edge, they begin to correctly see the market as the treasure hunt that it is. The treasure is discovering knowledge that others don’t have, or knowledge that is not widely known enough to have been already pilfered through arbitrage.

Trading is an evolving game – every trader’s journey takes a different path because everyone is searching for treasure along different routes. The only way to win is to be better than others, so trusting large institutions and formal education programs to provide a path to an individual’s profitability is always a losing proposition.

Regulatory interventions can force a fairer game, especially when it comes to giving retail traders increased access to data, ensuring the data is more transparent, and keeping prices consistent across the board. If technology and regulations keep up, trading can be profitable for retail investors. But a prerequisite to profit is dispelling the myths that the market is orderly, and the system is there to look out for your best interests. Ultimately, as a trader, the only champion you can trust is you.

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About the Author:

As CEO and Founder of BigShort.com, Tae-Hwan Jo leads the company to provide retail traders with access to a revolutionary platform that provides real-time market data and insights into market maker actions. He is a successful day trader with more than 20 years of experience. Throughout his career, Tae has served as a portfolio manager for Honey Badger Capital Management, Principal of Honey Badger Properties. In addition to day trading, Tae remains a dedicated entrepreneur who owns commercial real estate property and opportunity zone funds. He earned a Bachelor of Arts degree in economics with honors from the University of California San Diego.