What Types Of Stocks Do Retail Investors Trade?

What types of stocks do retail investors trade?

In the past we’ve talked about how a lot of retail trading of U.S. equities happens off-exchange and away from dark pools. In fact retail broker dealers route many retail orders, especially market orders, to wholesalers for fills, often with price improvement and sometimes Payment For Order Flow (PFOF).

But today’s charts are not (really) about incentives, they’re about learning a bit about what retail trades.

The way retail trades means a high proportion of their trades will print to the “non-ATS TRF,” and now that FINRA reports summary level volumes for those trades separately, we can get insight into “what” retail trades by seeing if there are types of stocks with high market share in the non-ATS TRF.

The results are astounding.

Retail loves micro-cap stocks

As the data in Chart 1 shows, retail appear to love microcap stocks. Each circle represents a ticker, with the larger circles being the higher average daily volume (ADV) stocks. The darker the circle, the more trading occurs not just off exchange, but specifically in the non-ATS TRF. So in theory more dark = more retail.

The chart also shows that spreads in these stocks are the widest in the market (the up-to-the-left shape of the dots), as the vertical axis here is spread. NMS rule 605 requires that wholesalers report on the execution quality of these trades, crossing such wide spreads. But 605 doesn’t work very well unless the lit quotes from exchanges are competitive in the first place. Ironically, this shows why it’s important for some exchanges to incentivize competitive quotes in thinly-traded stocks, even though most retail doesn’t trade on the exchanges. Which in turn highlights an area where exchanges who cross-subsidize (or bundle) market makers quoting profits across the spectrum of liquidity are providing an economic “good” for the market as a whole.

Chart 1: Small cap stocks trade a high proportion in the non-ATS TRF

Stock spread vs. market capitalization

Source: Nasdaq Economic Research

Institutional traders don’t love micro-cap stocks

In contrast, recall the Turnover Snake analysis that found stock turnover (percent of market cap that trades each year) falls dramatically for these microcap stocks. The fact that turnover seemed to fall once a stock fell outside the Russell 3000 market cap range seemed to confirm that institutional portfolio managers are constrained to broad index stocks, representing small cap and above.

Although some non-ATS TRF trades could also be institutional blocks, we think that’s unlikely to add to what we see in the chart, especially in light of the turnover changes we also see. That, in turn, suggests that institutions are “underweight” in micro-cap stocks.

What happens by stock price?

A different way to look at the data is to average by stock price.

As we saw in the color clusters in our original analysis of spreads, smaller cap stocks tend to have lower prices. So it’s no surprise to see high retail trading in the lowest price bucket of stocks.

What is a little more surprising is the U-shape, especially given the average retail trade is reportedly around $10,500, as that’s an odd lot in a $200+ per share stock. 

Although the increase in odd lots as stock prices rise is consistent with what we saw in our Odd Lot analysis, those charts focused on odd lots that were quoted on-exchange, and so are less likely to be mostly retail.

Chart 2: The same Chart 1 data grouped by stock price range shows an uptick in high-priced stocks too

Average Off-Exchange (non-ATS) Market Share by Price

Source: Nasdaq Economic Research

Actually, known brands matter too

Something that isn’t obvious from Chart 1 is that there is also an uptick in non-ATS TRF trading for mega cap stocks too, creating a U-shape across market cap.

Although this data might include more blocks from institutions, it may also reflect a natural tendency of retail investors to “buy tickers they know.” Ticker level analysis shows popular FAANG stocks generally have above average market share on the non-ATS TRF, even versus other stocks in that bucket.

Chart 3: Resorting the same data by market cap shows mid-cap is what retail likes the least

Average Off-Exchange (non-ATS) Market Share by Market Cap

Source: Nasdaq Economic Research

What does all this mean?

Although the U.S. equity markets are efficient, the economics driving them are far from equal across almost any dimension. The economics of buying a microcap stock are different for retail and institutional investors.  But that doesn’t mean the economics of encouraging a quote in those stocks is less important.

The U.S. markets are the deepest, cheapest to trade, and most liquid in the world. We attract IPOs from around the world because of that. In all the discussions about changing market rules, we need to be careful we understand all the interdependent economics, and do no harm.

Other Topics


Phil Mackintosh


Phil Mackintosh is Chief Economist and a Senior Vice President at Nasdaq. His team is responsible for a variety of projects and initiatives in the U.S. and Europe to improve market structure, encourage capital formation and enhance trading efficiency. 

Read Phil's Bio