Morning Has Broken: A Deep Dive Into The Trading Patterns Of The American Retail Invetor

Tyler Durden's picture

By Nicholas Colas of Convergex

Morning Has Broken

Intraday U.S. equity market volatility has been high throughout this week’s turmoil, and today we look into one specific reason: retail investors’ penchant for trading the open. Markets operate from 9:30am to 4:00pm every day, so why do personal investors insist on crowding into the opening print? To unravel this mystery, we turn to our old friend Google Trends – the online tool that allows you to see how many times users search for a given term. Looking at just the last seven days with a 15-minute window, the answer becomes clear. Non-investment professionals – real people, essentially – have a very specific routine when it comes to everything including investing. Market volatility pings their radar at 6:30am, when searches for “news” hit their weekday peak. That turns into a fast ramp of searches for “Stock quotes” and “ETF” which top out at – you guessed it – 9:30am.  By the time the close comes around, the number of those searches has dropped 50% or more.  Individual investors would do well to extend their attention to midday, even though that’s the time at which searches for the word “Shop” peak.   

* * *

A piece of my retirement savings is housed in a self-directed IRA at a major online brokerage, where I own a mix of equity and bond exchange traded funds as well as single stocks. It is not, by any means, a spicy mix.  All the ETFs trade like water most days and most are of a distinctly risk-averse composition.  As my first boss once told me: “Invest conservatively – you don’t want to have to make the same money twice.” 

So imagine my surprise Monday morning when during the sell-off two of these supposed bastions of low/hedged volatility in ETF form were off +20% at 9:40am. I was out of the office, and I kept hitting refresh to see if these were just bad prices on a spiky open. They weren’t. It took the better part of an hour for two funds – both of which have well over $100 million in assets – to come back up to something approaching their correct net asset value. Watching this all unfold was more like seeing a huge thunderstorm pass slowly overhead than just a “Flash Crash”. 

That got me thinking about something institutional investors often neglect until it hits them full force on a choppy day: how retail investors trade in volatile markets.  We all know the market aphorism – which anyone familiar with individual stock traders will tell you is true: “Retail opens the market, and institutions close it”.  But now that volatility is clearly back in U.S. stocks the difference between those two events – even on the same day - can be exceptionally stark. Will this most recent bout of market churn finally teach retail to avoid the open and thereby reduce intraday volatility?

Probably not, and I can make that case by using Google Trends and a bit of information about the typical daily patterns of everyday Americans.  If you’ve never used it, the Google product allows you to see how many times its users search for a given term. You can look back a decade or a day, focus on the U.S. or any other country’s Internet population, or a combination of the two. What you get is a line chart of search frequency and map of where that particular search is most popular. 

So, let’s start with the typical American’s day – according to numerous online studies done over the years, we wake up between 6-8am. The single most popular alarm setting is 6:00am, followed by 7:00am.  We arrive at work between 7:30 and 9:00 am in our local times, most typically at 8:00am or a little after. 

It is during these morning hours that Americans are most likely to Google the terms “Weather” and “News”, for example. This could well be a vestige of the old newspaper delivery cycle, but peak interest in “News” searches is 6:30 – 7:30am am every morning, based on the Google Trend data for the last 7 days. By noon Eastern Time, the number of searches for that term has dropped by more than half.  The same pattern occurs for financial news searches like “CNBC”, “WSJ”, “Financial Times” and “Zerohedge”. 

Given that the individual investors get their news in the morning more than any other time of day, the whole “Trade the open” phenomenon begins to make sense.  Still, let’s follow it through using the Google Trend data, with a specific focus on the last 7 days:

  • Searches for “Stock quote” peak between 9:30 – 10:30am Eastern Time and double between roughly 7:30am and the open. After that it trends lower through the day, with a small uptick at the close that is about 50% of the interest as compared to the open. Market volatility understandably spurs incremental attention: the number of Google searches for “Stock quote” on the open Monday was more than double that of the previous Thursday/Friday for the same time of day.
  • Searches for “ETF” mirror the intraday pattern for “Stock quote” almost exactly – a spike at the open and then waning interest until a small uptick at the close. 
  • Searches for online brokers – we use TD Ameritrade, Fidelity and E-Trade as proxies here – also follow the pattern, albeit with a lot more volatility.  Searches Monday morning for these three queries were approximately 3-4x higher than the prior Thursday/Friday. Today’s search volumes for these terms were still 50% higher than last week as well.
  • Searches for popular retail investor symbols like “AAPL”, “GOOG”, “NFLX” and “AMZN” all peak at 9:30am Eastern Time as well.  In case you are wondering, the order I just outlined mirrors their relative popularity as a Google search, with the ratio of searches from this morning’s open at: AAPL (49), GOOG (10), NFLX (9) and AMZN (4).  Searches around the close are roughly 50% of those at or near the open, at least over the past week. 

Clearly, Americans associate the morning with “Time to trade equities”. They hear news – in the case of the last few days, bad news from overseas – first thing in the morning. By the time the market opens, they have made their decisions and entered their orders. About half as many will check in around the close to see how things turned out, but for many the next piece of market news won’t hit their mental “Screen” until 20 hours or so later. 

So what types of searches dominate the rest of the day?  Basically, anything but trading stocks.  Popular news sites like Buzzfeed see their Google search traffic spike around noon, presumably as workers take their lunch break and look for some diversion with their meals. Searches for “Shop” have a long plateau from 12:30pm to 3:30pm, presumably because of a similar lunch time break that allows some online errand-running. Come the evening and sites like Yelp and Grubhub hit their strides from 6:30 to 8:30pm and again at 10:30pm East Coast Time, or West Coast dinner time. 

The basic takeaway from this analysis is simple: individual investors are unlikely to migrate away from trading the open. The attention patterns that Google Trend data highlights shows a clear bias to take in incremental news first thing in the morning, look at stock prices immediately after, and take action at 9:30am. That means we’ll likely have some more choppy opening prints in the coming weeks of market wide volatility. For the institutional trader, this presents a clear opportunity. And for the retail trader, either become a contrarian (always a good idea, but especially so now) or try to break free of the urge to get that 9:30am price. 

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q99x2's picture

Did anyone vet this article

6am and somebody monkey-hammered gold lower.

Salzburg1756's picture

Yes, his picture is above.

Creepy A. Cracker's picture

Headline: "... The Trading Patterns Of The American Retail Invetor."

We are getting closer to full Ebonics.  "Duh invetor dun did dat."

tgatliff's picture

Invetor... Even with the spelling correction "Investor".. It is singular... As in only one person (Apparently that baby) is trading currently... For everyone else, all you need in low volume is the USDJPY (Thanks BOJ!!!) to trade...

junction's picture

More bad news, and the hits keep on coming.  And World War III continues to rage in the Middle east and north Africa, the unreported war.

Tyler: Investor in the title is misspelled.

NoDebt's picture

The correct spelling is  M U P P E T

DirkDiggler11's picture

When I can trade faster than a HFT algo, then k will re-enter the "market".

Strange thing though, when I stop into my local coin shop to pick of some phyz, I have never had a computer rush in through the front door ahead of me and buy some coins before I could get them....

LoneStarHog's picture

They were there and gone at HFT speed.  You will never actually see an Algo; much like Bigfoot, only the stench remains.

froze25's picture

Or make a bid only to take it away a few hundred times with no intention of executing it before you can even open your mouth.

astoriajoe's picture

I think DARPA is working on that as we speak.

Grandad Grumps's picture

Retail investors typically have day-jobs... duh.

HFT, Specialists and Market Makers open the market to scalp retail.

LoneStarHog's picture

There are no retail investors in this corrupt casino, only sick-o gamblers.

ZeroPoint's picture

VIX and DXD are your friends. Psst. There is also a 10 am ramp.

Larry Dallas's picture

"A piece of my retirement savings is housed in a self-directed IRA at a major online brokerage."

WRONG. If it were truly self-directed you'd have money in entity-level investments like private partnerships, or investment real estate yourself. Not ETFs and stocks. Companies like Equity Trust and Vantage IRAs are true self-directed IRAs.

I myself like to make loans against real estate. I can burn it down if it doesn't sell or if the owner doesn't pay... www.MakingTheYield.com

Clowns on Acid's picture

What is this thing "called the market" that Colas speaks of? Is he referring to the centrally planned Stalingard and Poorsky Noe Bolshevik Index?

Ban KKiller's picture

So the small investor thinks there is some sort of parity in our "free" market whereby he can trade like the banksters? Too fucking funny! 

No small investor bought at the dip, for a fact. 

klayton biggs bee's picture

Well all I know is that for 3 mornings in a row an apparent lost tom gobbler has been entering my yard near my well pit looking for company.....I'm pretty sure I'm starting to see a trend here!

headhunt's picture

Please shoot that bastard - head shot

Mike Honcho's picture

"It took the better part of an hour for two funds – both of which have well over $100 million in assets – to come back up to something approaching their correct net asset value." - no comment....

CHX's picture

Tylers, please spell check the title. Now to reading.

I Write Code's picture

I suppose that more or less describes me too, but that's an "investment" pattern, not an intra-day trading pattern, so what.  In a market with no price discovery, who cares when you trade.

JoWazzoo's picture

Where is the info of actual trades at the open?  Google searches doan mean crap.

Praeda2's picture

People who search for, 'stock quotes', don't trade stocks. The author is looking for some bullshit to fit the narrative he's pushing. Google Trends is worthless as the people are overwhelmingly worthless. Their 100 shares of whatever like them, don't matter. The few that having anything are in some dog shit mutual fund with their retirement savings.

mkhs's picture

Wow.  So the google trend is "normal" American standard behavior.  What about the people that use startpage, duckduckgo, gopher, or even bing?