WSJ "Expansion of Retail Investors' Margin Trading Increases Market Volatility"

Increased Likelihood of Selling When Adverse Events Occur

[Asia Economy New York=Correspondent Baek Jong-min] As the emergence of the Omicron COVID-19 variant dragged down stock markets worldwide, including the New York Stock Exchange, an analysis has been raised that the expansion of margin trading by individual investors influenced market volatility. It is an analysis that increased participation of individuals in the stock market raises market volatility when adverse events occur.

The Wall Street Journal (WSJ) analyzed on the 28th (local time) that the major indices of the New York Stock Exchange all plunged by over 2% on the 26th due to the impact of the Omicron variant, which is related to the expansion of margin trading by individuals.

WSJ focused on the fact that since last year, many individual investors have entered the stock market, significantly increasing not only cash stock margin trading but also options trading.

WSJ evaluated that the market crash on the 26th revealed the vulnerability of the stock market, which had maintained an upward trend since the COVID-19 crisis. The vulnerability WSJ was concerned about is the excessive expansion of margin trading and increased borrowing transactions.

According to the U.S. financial regulatory authority, the Financial Industry Regulatory Authority (FINRA), as of October, the loan amount for margin trading in the U.S. reached $935.9 billion, a 42% increase compared to the same period last year. As loans increased, the cash holdings of individual investors dropped to 46% of their borrowings. This is the lowest level since 1997.

Jason Zepfert, head of Sundial Capital Research, explained, "When stock trading through borrowing increases and the market shakes, investors become confused and start panic selling."

The U.S. central bank, the Federal Reserve (Fed), also expressed concerns about the excessive expansion of stock margin buying. In a recently released financial stability report, the Fed mentioned concerns about excessive margin trading among young people. The Fed warned that since young investors tend to have aggressive investment tendencies, they are highly likely to have been subject to forced liquidation during stock market declines.