The Australian Securities and Investments Commission (ASIC) has fired a shot over the bows of retail investors who it says have been chasing quick profits by playing the markets and losing.
The regulator said that trading activity in contracts for difference (CFDs) had increased significantly during the COVID-19 period of heightened volatility and that the leverage inherent in CFDs magnified investment exposure and sensitivity to market volatility.
It said that in the week 16 March to 22 March retail clients’ net losses from trading CFDs were $234 million for a sample of just 12 CFD providers.
ASIC said an analysis of markets during the COVID-19 period had revealed a substantial increase in retail activity across the securities market, as well as greater exposure to risk.
“We found that some retail investors are engaging in short term trading strategies unsuccessfully attempting to time price trends. Trading frequency has increased rapidly, as has the number of different securities traded per day, and the duration for holding the securities has significantly decreased: indicating a concerning increase in short-term and ‘day-trading’ activity,” it said.
The regulator cautioned that ‘even market professionals find it hard to ‘time’ the market in a turbulent environment, and the risk of significant losses is a regular challenge.
“For retail investors to attempt the same is particularly dangerous, and likely to lead to heavy losses – losses that could not happen at a worse time for many families,” it said. “Retail investors chasing quick profits by playing the market over the short term have traditionally performed poorly – in good times and bad - even in relatively stable, less volatile market conditions.”
In addition to the increased trading, there was a sharp increase in the number of new retail investors to the market – up by a factor of 3.4 times – as well as a marked increase in the number of reactivated dormant accounts.
“The higher probability and impact of unpredictable news and events in offshore markets overnight only magnifies the danger. ASIC is therefore particularly concerned by the significant increase in retail investors’ trading in complex, often high-risk investment products. These include highly-geared exchange traded products, but also contracts for difference,” it said.