DBRS Morningstar Releases Commentary on Volatile Stock Trading Activity by Retail Investors

DBRS Limited (DBRS Morningstar) published a commentary titled “Recent Retail-Driven Trading Volatility Poses Limited Threat to the Canadian Brokerage Sector” that discusses the impact that increased speculative trading may have on Canadian online brokerage platforms and retail investors.

Key highlights include the following:

-- The increase in stock trading by retail investors has been driven by rising equity markets, fiscal stimulus, increases in disposable income because of lockdown measures related to Coronavirus Disease (COVID-19), and increased volatility that can provide opportunities for large gains.

-- Speculative trading can result in brokerages having to post large collateral requirements to the clearinghouses that manage and settle trades because of increased liquidity and credit risk.

-- Canadian online brokerages are for the most part owned by the large domestic banks, which are well capitalized and benefit from strong risk management infrastructure, making a default situation unlikely.

DBRS Morningstar notes that “in our view, increased equity market volatility resulting from speculative trading is likely to have an indirect rather than a direct impact on the broader financial markets or on other investors, with a systemic issue being unlikely,” says Komal Rizvi, Vice President, Global Financial Institutions Group. “Collateral requirements for brokerages are generally transparent and should not be an issue for a well-capitalized financial institution with good cash flow.”

Notes:
All figures are in Canadian dollars unless otherwise noted.

The commentary is available at www.dbrsmorningstar.com.

For more information on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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