UK retail investors are increasingly looking at trading in companies listing on US stock markets because of the fall in appeal of the London stock market over the past 10 years, the CMC Markets' report into retail trading trends has said.
In recent times, the London Stock Exchange (LSE) seems to have been having difficulty persuading firms to launch their initial public offerings (IPOs) on the exchange. In 2023, the LSE saw only 24 IPOs, the lowest amount since 1995.
Not only that, but fast-growing companies in the UK are also being forced to be ever more dependent on foreign investors.
According to the CMC Markets' report, for 29% of retail traders - those who trade for themselves, not in a professional capacity - trading is no longer a hobby, but a way for them to make enough money eventually to leave their full-time job down.
For about a third of retail traders, trading already accounts for about 11 to 20% of their income, while nearly 25% of traders said that they earn 21% to 30% of their income through it.
As such, they are taking trading much more seriously than before, and are willing to go where the opportunities are seen to be greater.
Jochen Stanzl, chief market analyst at CMC Markets said in a press release: "Retail trading has taken a very different shape to where it was five years ago. The pandemic opened the door to a whole new demographic of traders.
"As the data shows, retail trading is so much more than a hobby. And most traders are taking advantage of a highly volatile market, following economic calendars to inform their strategy and managing their emotions well to mitigate risk.
"For 2024, we found that shorting IPOs will be a priority, as will closely monitoring interest rate changes and major US companies during earnings season. With artificial intelligence (AI) around the corner, retail trading is set to transform even further."
Why are UK retail traders looking to the US?
One of the key reasons more UK retail traders are considering taking their business to the US is that most of their trading is already very US-centric. Most of the big stocks traded by UK retail traders, such as Netflix, Amazon and Tesla, are US stocks.
Almost 50% of traders also conduct their trades keeping the opening and closing times of the US market in mind. The biggest retail traders also invest in mainly Nasdaq 100 companies.
Stanzl said in an email note: "Retail traders are increasingly attracted to the US stock market due to its diverse range of investment opportunities, especially in large and influential companies across various sectors like technology and artificial intelligence.
"The US market is also known for its high liquidity, which facilitates easier transactions, with low bid-ask spreads. Additionally, the regulatory environment in the US provides a sense of security and transparency, and trading in the world's primary reserve currency, the USD, offers stability and global acceptability.
"These factors continue to make the US an appealing market for retail investors seeking growth, innovation and a stable investment environment."
This is a blow for the UK stock market, which has recently seen heavyweights such as Flutter Entertainment, CRH and Smurfit Kappa announce they will be leaving for the US.
The LSE and the British government also failed to convince UK semiconductor giant Arm Holdings to list on the LSE. Since then, other prominent companies such as Shell and Tui have also announced they are mulling a move to the US.
Coming to what this trend means for the UK stock market, Stanzl said: "The trend of retail traders moving their focus from the UK to the US stock market might lead to decreased liquidity in the UK market, as trading volumes drop, which could increase volatility and widen bid-ask spreads.
"This shift could also negatively impact valuations, making UK stocks potentially appear undervalued compared to their US counterparts. Additionally, market sentiment might suffer, possibly deterring further investment. There are also increased risks and costs for UK investors, including currency fluctuations and potentially higher transaction fees.
"On a broader scale, this shift could signal to regulatory bodies that the UK market needs to become more competitive or appealing, potentially spurring regulatory adjustments or initiatives to enhance market attractiveness."
What can the UK do to retain retail investors?
CMC Markets believes LSE-listed companies need to improve market engagement and investor communication.
UK companies are often advised to not share anything but good news with retail investors, which can cause anxiety if things don't go to plan whereas companies that are more open with communications - good or bad - often find investors are more responsive to their reports.
It believes the UK stock market needs to take decisive steps to reduce bureaucracy, both in terms of launching IPOs, for companies, as well as investing regulations and requirements for retail traders. The UK small and mid-cap sector is also in dire need of more support measures, in order to make them more attractive to retail investors.
Alex Stella, chief operating officer (COO) and UK head of InvestorHub said in a press release: "Investor relations in its current form is not working, especially in the UK, where valuations are well behind other markets.
"The technology used to allow retail investors to purchase shares in listed businesses has advanced rapidly, whilst the technology used for subsequent communication and engagement has stood still.
"Part of the reason for this mismatch is the disconnect between listed businesses and their investors. Intermediation is stubbornly high in public markets. The way to get British investors excited to invest in great British companies is to bring them closer. We should be treating investors as well, if not better, than we do customers.
"Very few businesses can communicate directly with their retail investors. Unfortunately for them, these are the investors that do more to influence their valuation in the long-term than the top shareholders."
