Saturday, November 2, 2019

The One With the Noise Traders

It wasn’t terribly long ago (okay, fine, it was 23 years ago, I’m dating myself) when Friends aired this:

 

I’m guessing that depiction of stock trading was accurate for most people; it wasn’t that it was necessarily hard to open a brokerage account and trade, it was simply that most people didn’t quite understand the mechanics of how to go about it.  Even with online trading, you still have to go out of your way to seek opportunities to trade.  But what happens if stock trading is one of several simple options presented when people open up an app that they use every day?

That question is apparently about to be answered: Square, the payments app, recently announced that it will begin permitting free stock trades on its platform, setting itself up as a competitor to Robinhood. And the part that interests me isn’t simply the prospect of free trading, but the prospect of easy trading, accomplished with all the forethought of a candy bar purchase in the grocery check out aisle.

I suppose retail shareholders will never replace institutions for sheer size, but enough could enter the market to make some difference.  Will their uninformed trades create new opportunities for hedge funds to profit – perhaps by reducing some of the distortions introduced by indexing?  Will we see something like a “consumer premium,” whereby retail traders favor household names, companies they prefer because they patronize? 

Will corporations try to cultivate retail shareholder bases?  It is generally believed retail shareholders are more passive about voting, and more likely to vote with management when they do cast a proxy ballot; if the retail market surges, I can imagine corporations reaching out to these shareholders.  Stock splits might come back in vogue, to attract retail investors who are disinclined toward impulse purchases of stocks priced in the $2000 range (even with the possibility of fractional trading).

Will we see a more vigorous effort to involve retail shareholders in the voting process?  Will there be special mechanisms to enable retail shareholders to ask questions of executives on conference calls?  Will we see more proxy solicitations like this one?

If we do, will retail shareholders use default voting arrangements and technological tools to oppose ESG related proposals?  Or will an influx of casual retail shareholders result in greater ESG support?  Will a cottage industry of retail proxy advisors sprout up – especially nonprofits with an agenda (i.e., “download the Sierra Club’s default voting instructions, compatible with the Square app!”)

If there are more retail shareholders in the market, will Delaware reconsider cases like Corwin, which are predicated on the existence of a highly institutionalized shareholder base?

I suppose it’s all a thought experiment for now but I do wonder how technological ease of stock trading has the potential to reshape the market.

https://lawprofessors.typepad.com/business_law/2019/11/the-one-with-the-noise-traders.html

Ann Lipton | Permalink

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