Retail investors count cost of trading platforms meltdown

A frenzy of trading among retail investors overwhelmed the systems of at least 10 of the world’s largest brokers this week, as they rushed to cash in on a sharp market rally triggered by positive Covid vaccine news.

Platforms including Hargreaves Lansdown, Fidelity International and AJ Bell in the UK and Charles Schwab, ETrade, TD Ameritrade and Vanguard in the US, suffered problems including simultaneous slowdowns, crashes and blockages that prevented customers from logging in to place trades.

The problems have heightened concerns over platforms’ ability to cope with increased retail trading, prompting the UK financial regulator to raise questions over whether they were adequately stress tested. 

Hargreaves Lansdown, the UK’s largest retail investment platform, experienced outages as well as thousands of duplicated trades, causing “extreme stress” to investors. One client trading a £25,000 Isa into tech company shares, realised something was wrong when she received seven confirmation emails — and saw she owned more than £175,000 in shares, pushing her ISA £150,000 into debt.

Other investors were forced into large short positions with shares they did not own as trades multiplied. Increased pressure on phone lines caused additional delays and prevented some customers from reporting problems.

“We couldn’t get in Hargreaves from the computer or the app,” one customer told the Financial Times. “I thought we’d transfer all our investment accounts to Hargreaves, but that’s very unlikely now. But almost everyone also went down — I don’t know where to go.”

Column chart of US equities market, total volume (bn) showing Trading frenzy

Trading volumes broke all records for platforms as markets rose on Monday, doubling or tripling what they would ordinarily handle.

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“It’s not the first time we’ve seen platforms struggle, but it is the first time we’ve seen almost all of the platforms quite literally fall over at the same time,” said Holly Mackay, founder of consumer investment consultancy, Boring Money.

Retail investment platforms have signed up record numbers of customers and reported greater trading activity since March. In the US, more than 265bn equity shares were traded by retail investors in the second quarter of this year, up 93 per cent from the first quarter, according to Bloomberg. 

The UK now has more than 6.5m retail investors, up 15 per cent from 5.7m this time last year, according to Boring Money’s estimates.

Hargreaves Lansdown added 188,000 new clients in the first half of 2020, 43 per cent more than in the same period in 2019. AJ Bell added almost 63,000 customers in the year to September 30, growing its platform by 29 per cent.

“As the volume of investors increases, and we expect it will . . . there will probably be bigger operational issues,” said Ms Mackay, especially if market volatility persists.

Ivan Ashminov, co-founder of Trading 212, one of the UK’s largest no-fee platforms that also experienced problems on Monday, said: “There have been days when the market opened and everyone wanted to trade, and they literally melted the servers.”

Trading volumes when the US market opened on Monday were 130 per cent higher than the platform average and half the trades made by customers would not go through, he added. “No one in the industry was prepared for what happened.”

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Investment providers are required by the Financial Conduct Authority to stress test their systems, but these tests are difficult to perform in isolation. Often vulnerabilities cannot be identified until there is a problem, warned Larry Tabb, head of market structure research at Bloomberg Intelligence.

Almost every provider from the no-fee app Robinhood, popular with day traders in the US, to the old buy-and-hold stalwart Vanguard, has experienced outages on some high traffic days this year.

After Monday’s meltdown, the FCA said: “We expect investment platforms to plan for unexpected scenarios . . . and maintain operational resilience.” The UK regulator added that it was in contact with the affected platforms.

In October, Nick Strange, a senior adviser on operational risk at The Bank of England, expressed concern about the strain national lockdowns were placing on financial platform IT departments as they needed to increase capacity. The BoE plans to publish new resiliency requirements for the sector in early 2021.

Retail platforms have expanded rapidly to meet demand for investors in recent months. Trading 212, for example, has grown its assets under management from £100m in January to £1.2bn this month.

But as they expand, their technical infrastructure becomes more complex, said Mr Tabb, leading to higher risk of failure — and more unhappy customers unable to trade.

Many platforms issued statements apologising for the outages this week, but some warned they could not guarantee against further failures.

Mike Barrett, director of consultancy Lang Cat, also had a warning for retail traders frustrated by the problems. “In a market where trades occur in fractions of seconds, “by the time they could have logged on, they’ve already missed the boat,” he said.

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