Could retail ‘regular investments’ influence the market?
Discussion
Something that’s just occurred to me, forgive me if it’s a naïve question 
A lot of the popular trading platforms offer ‘regular investment' services which trade on a fixed date each month at a reduced fee. Interactive Investor, for example, executes on the third Wednesday; Hargreaves Lansdown is the tenth of each month.
If all the customers of these big platforms are buying at the same time, for arguments sake let’s say they are all buying a UK index fund, could this purchase volume be enough to influence the market, i.e. drive prices up, even by a few bips? Or is this level of retail investment insignificant in the grand scheme of things?
A lot of the popular trading platforms offer ‘regular investment' services which trade on a fixed date each month at a reduced fee. Interactive Investor, for example, executes on the third Wednesday; Hargreaves Lansdown is the tenth of each month.
If all the customers of these big platforms are buying at the same time, for arguments sake let’s say they are all buying a UK index fund, could this purchase volume be enough to influence the market, i.e. drive prices up, even by a few bips? Or is this level of retail investment insignificant in the grand scheme of things?
I suspect it would be a very odd day in the markets for the combined, automated/scheduled flow of a few retail investment houses to have a verfiable impact on pricing as the collective value isn’t all that big and the typical instrument is on the more liquid end of the equity market.
But as an overall effect it is categorically there and indeed features as a partial driver in some sort term investment strategies looking for alpha.
It’s the steady, relentless inflows of capital from UK and global pension/investment funds that makes up the bulk of the background chatter/flow on the exchanges and on very quiet days when there are zero fundamental reasons for buying or selling then it can comprise the bulk of the day’s flow. It’s a modest, relentless, ever present, in normal conditions, capital flow into the markets.
It’s this positive background flow that helps a dividend arb strategy work where the stock goes ex and should drop by the same amount but in benign or positive market conditions will fall by less than the dividend paid due to buying flow.
A very specific strategy that works entirely because of retail flow is the arbing of temporary widening of discounts to NAV on small to medium investment trusts when a fund trades out of a position.
Someone like HSBC may be holding 3% of a smallish investment trust and decide to rewritten that holding to 2% in light of expected changes in fundamentals. They can’t just sell that 1% holding because liquidity is very low so they have to sit on the order book for maybe a week or two delivering regular and modest sizes of stock as best as the market can absorb. You can detect these anomalous flows and then watch for the price of the IT being slowly depressed further away from its normal discount to NAV. If that temporary depression is sufficient you can then start sitting on the other side of HSBC and taking their flow onto your own book at this discounted level. You then hedge it with your own basket that reflects the composition of the fund but doesn’t value at a discount to the constituents and wait for HSBC to finish selling and for the price of the IT to move back up to its normal discount to NAV, at which point you start unwinding your much smaller position and crystallise your hedged gains.
But as an overall effect it is categorically there and indeed features as a partial driver in some sort term investment strategies looking for alpha.
It’s the steady, relentless inflows of capital from UK and global pension/investment funds that makes up the bulk of the background chatter/flow on the exchanges and on very quiet days when there are zero fundamental reasons for buying or selling then it can comprise the bulk of the day’s flow. It’s a modest, relentless, ever present, in normal conditions, capital flow into the markets.
It’s this positive background flow that helps a dividend arb strategy work where the stock goes ex and should drop by the same amount but in benign or positive market conditions will fall by less than the dividend paid due to buying flow.
A very specific strategy that works entirely because of retail flow is the arbing of temporary widening of discounts to NAV on small to medium investment trusts when a fund trades out of a position.
Someone like HSBC may be holding 3% of a smallish investment trust and decide to rewritten that holding to 2% in light of expected changes in fundamentals. They can’t just sell that 1% holding because liquidity is very low so they have to sit on the order book for maybe a week or two delivering regular and modest sizes of stock as best as the market can absorb. You can detect these anomalous flows and then watch for the price of the IT being slowly depressed further away from its normal discount to NAV. If that temporary depression is sufficient you can then start sitting on the other side of HSBC and taking their flow onto your own book at this discounted level. You then hedge it with your own basket that reflects the composition of the fund but doesn’t value at a discount to the constituents and wait for HSBC to finish selling and for the price of the IT to move back up to its normal discount to NAV, at which point you start unwinding your much smaller position and crystallise your hedged gains.
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