Technological and Regulatory Shifts Reshaping the Financial Marketplace
PLUS: After Earnings with Kura Sushi ($KRUS) and Lovesac ($LOVE)
This week's Roundtable Roundup zooms in on the transformative effects of technology-driven regulatory changes and the enduring interest of retail investors, painting a picture of a financial marketplace in evolution. With the tumultuous explosion of retail investor-oriented products and services during the pandemic era now settled, the landscape sees the emergence of a more stable yet innovative battleground for financial entities. As regulatory frameworks like the T+1 settlement cycle and updates to 13F filing timelines come into effect, they not only streamline processes but also enhance the shareholder experience, reflecting technological progress that aligns with investor convenience and efficiency.
The players that have weathered the downturn of 2022 are not just surviving; they are poised to redefine competition within the financial sector. With new platforms and services, these institutions are well-equipped to challenge even the largest financial giants, underscoring a shift towards a more inclusive and dynamic market environment. From 24-hour trading considerations to the digital revolution in shareholder engagement, the current financial narrative is one of significant transformation, driven by a confluence of innovation, regulatory support, and robust retail participation.
The Thrill Factor Is Back for Retail Investors (WSJ)
Rising Stock Market Entices Retail Traders: The robust rally in stocks during early 2024 has reinvigorated interest among retail investors, with trading activity on platforms like Charles Schwab, Morgan Stanley, and Robinhood reaching levels not seen since early 2022. This surge in enthusiasm follows a period of market downturn in 2022 when many retail investors had pulled back.
Record Performances and Sector Gains: The S&P 500 showcased its best first-quarter performance in five years, achieving 22 record closes before a drop in April. Notably, shares of Nvidia surged by 77%, reflecting a strong comeback in investor sentiment. This optimism was mirrored across ten of the eleven sectors in the S&P 500, all of which saw gains.
Social Trading Groups Surge in Popularity: The excitement around trading has spilled over into social media, where trading groups are experiencing significant growth. Allen Tran's HaiKhuu Trading group on Facebook, for example, grew to about 83,000 active members, demonstrating a heightened engagement and community among traders.
Concerns and Optimism Coexist: Despite the recent stock market drop and concerns over persistent inflation, some investors remain optimistic about the financial landscape in 2024. Individuals like Julio Padilla are hopeful about the potential for interest rate cuts and the positive impact of the presidential election year on the markets.
Transition to "T+1" Settlement Cycle Effective May 28, 2024 (Finra.org)
What is a Settlement Cycle? The settlement of a trade, when securities and funds are officially transferred, is set to become faster due to amendments from the Securities and Exchange Commission (SEC) and corresponding FINRA rule changes. The move from a two-day (T+2) to a one-day (T+1) settlement cycle after the trade date begins on May 28, 2024. This change builds on the previous adjustment in 2017 from T+3 to T+2, reflecting advancements in technology that streamline the settlement process.
What the T+1 Cycle Means for Investors: Under the new T+1 settlement rule, transactions for securities like stocks and bonds will need to be finalized by the next business day. For example, if you sell shares on Tuesday, the transaction will settle by Wednesday. This adjustment means that payments and deliveries of securities must occur more swiftly than before. Investors might need to arrange for quicker payment methods, such as ensuring ACH payments are completed in time, as the funds must be deposited in the brokerage firm’s account by the settlement date.
Practical Changes for Transactions: Investors holding physical, paper securities certificates might need to deliver them to their brokerage firms earlier to meet the new timeline, although holding physical certificates is increasingly uncommon. For electronic securities, brokerage firms will handle the expedited delivery.
Scope and Impact of the T+1 Rule: The T+1 cycle applies to the same range of securities previously under the T+2 cycle, including stocks, bonds, municipal securities, certain mutual funds, exchange-traded funds, and limited partnerships that trade on exchanges. This shift will align the settlement times for these securities with those for options and government securities, which already settle the next day.
Margin Account Considerations: While the settlement cycle is changing, the computation of margin requirements on a trade-date basis remains unchanged. However, the period for meeting Regulation T (initial) margin calls is shortened by a day to T+3, emphasizing the need for timely fulfillment of these requirements without altering the timelines for maintenance margin calls.
New push to lower 13F filing deadlines (IR Magazine)
Joint Petition for Rule Change: The Society for Corporate Governance, NIRI, and the NYSE have petitioned the SEC to accelerate the disclosure deadline for 13F filings from 45 days after the end of each quarter to no more than five business days, aiming to enhance the timeliness and relevance of market data.
Rationale Behind the Push: The push for a shorter deadline is driven by the advancements in technology that enable rapid trading and settlement processes, contrasting sharply with the current slower pace of reporting shareholdings four times a year, significantly delayed after the quarter ends.
Recent SEC Actions and Proposals: The groups cite recent modernizations by the SEC, like the shortened disclosure time for substantial shareholder positions, to support their call for quicker 13F filings. They argue that current technologies make it feasible for investors to comply with a more prompt disclosure regime.
Broader Support and Legislative Efforts: NIRI is encouraging public companies to support this initiative by submitting letters to the SEC and has provided a template to simplify this process. Additionally, NIRI is advocating for legislation that would allow the SEC to mandate monthly instead of quarterly 13F filings, further increasing transparency in U.S. equity markets.
The Broker App-pocalypse Is Here (This Week in Fintech)
Decline in Demand and Broker Closures: The brokerage industry is experiencing significant downturns, highlighted by a reduction in user activity and the closure of at least 12 U.S-based brokerages since the COVID-19 pandemic. This includes notable exits by firms like Stocktwits and Goldman Sachs’ Marcus Invest, which have sold off their brokerage assets to competitors.
Challenges Facing the Brokerage Business: The brokerage sector is grappling with a saturated market, diminishing venture capital interest, and the high costs associated with acquiring and retaining customers. Notably, firms like Futu Holdings have incurred substantial marketing expenses, demonstrating the financial strain of maintaining competitive user acquisition rates.
Impact of Financial Incentives: Brokerages are increasingly relying on aggressive financial incentives to attract customers, such as Robinhood offering a 3% match on incoming retirement deposits. This trend is raising costs and making the market even more competitive, potentially unsustainable for smaller, undercapitalized fintechs.
Lack of Differentiation and the Role of Design: The article also points out the lack of product differentiation in the market, with many brokerages mimicking successful models like Robinhood without distinguishing themselves in significant ways. Additionally, there is a critical view of the user experience provided by many apps, suggesting that poor design may hinder customer retention and acquisition.
Strategic Shifts and Future Outlook: As the market contracts, there is an expectation of increased consolidation within the industry and a potential pivot by surviving brokerages towards more diverse financial services, including cryptocurrencies and derivatives. The future might see brokerages integrating more seamlessly into larger financial ecosystems or transitioning to roles as companion apps, supporting broader financial services platforms.
What would happen if stock trading was available around the clock (Axios)
Context and Rationale: The New York Stock Exchange (NYSE) is exploring the possibility of introducing 24-hour stock trading, prompted by the convenience it could offer to small traders, particularly those in Asia. This move is partly influenced by the existing models of 24-hour trading in bonds and currencies and aims to address the growing interest in more flexible trading hours.
Current Landscape and Concerns: Currently, platforms like Blue Ocean and Robinhood provide limited 24-hour trading opportunities for small investors through private share sales, which are not reflected in official market prices. If the NYSE were to adopt 24-hour trading, it would make prices publicly available and potentially attract more attention from high-frequency traders and hedge funds.
Potential Market Dynamics: The article highlights concerns that 24-hour trading could lead to a "gambler's paradise" with low volumes and wide spreads, typical of off-hours markets. Such conditions could exacerbate the risks for investors and lead to a more volatile trading environment. Additionally, it is suggested that the move could dilute trading volumes throughout the day, prompting institutional investors to concentrate their activities during the opening and closing sessions, which offer more substantial volumes.
Regulatory and Economic Considerations: A new exchange, 24X, has applied to the SEC for permission to operate around the clock, indicating serious moves toward implementing 24-hour trading. The NYSE's involvement could create new revenue opportunities for brokers that specialize in trading against retail investors, like Virtu Financial and Citadel Securities.
Broader Implications: The proposal for 24-hour trading raises questions about market liquidity and the behavior of different investor classes. While institutional investors might gravitate towards high-volume periods, small investors might prioritize convenience, potentially increasing their exposure to risk during off-hours.
The Shareholder Revolution Will Not Be Televised. It's here, already: Online. (Alexander Cohen - Linkedin)
Challenges in the Current Shareholder Landscape: Today's financial markets, despite their global reach and rapid information flow, present significant challenges for public companies, particularly in managing shareholder relations. Retail shareholders, though more connected and informed than ever, remain elusive and disengaged, making effective communication and governance difficult. Traditional methods of shareholder engagement, like proxy voting, are often hindered by outdated, opaque, and costly processes, contributing to low participation rates among individual investors.
Technological Solutions and Opportunities: The disconnect between shareholders and companies, a vestige of pre-digital times, is now addressable through modern technology. This technology enables companies to cultivate deeper, more meaningful relationships with their shareholders online. Innovative platforms are emerging to modernize shareholder governance, moving away from inefficient paper-based systems to digital interactions that encourage greater shareholder involvement.
The Future of Shareholder Engagement: The landscape of shareholder engagement is undergoing a transformative shift, facilitated by the digital revolution. This shift is evident in the increasing direct ownership of stocks by households and the growing demand for transparency and accessibility from companies. New technologies are making it possible to engage shareholders effectively, even amidst challenges like internet bots and the dilution of online ad spend.
The Role of New Technologies: Companies like Urvin are at the forefront, developing technologies that enable verified shareholder communities and secure, meaningful interactions online. These platforms provide shareholders with easy access to relevant materials and a forum for active participation, thereby fostering a more engaged and informed investor base.
Conclusion: The shareholder revolution is unfolding online, reshaping the way companies interact with their investors. As the financial landscape continues to evolve, embracing these new digital solutions will be crucial for companies aiming to bridge the gap between them and their shareholders, ensuring more democratic and effective corporate governance.
Last Week on After Earnings: Kura Sushi ($KRUS)
In this episode, host Katie Perry sat down with Kura Sushi USA’s KRUS 0.00%↑ Chief Financial Officer Jeff Uttz to explore how Kura Sushi is revolutionizing the sushi experience through partnerships and innovation. From gamifying the dining experience to sourcing sushi globally and Americanizing the menu, Kura is making waves in the industry. The discussion also touches on the growth of sushi in the US, the importance of quality in dining, and the company's plans for expansion.
This Week on After Earnings: LoveSac ($LOVE)
In this episode of the After Earnings, host Katie Perry sat down with Lovesac LOVE 0.00%↑ CEO Shawn David Nelson to discuss Lovesac's success as a modular couch company whose products are designed to adapt and grow with users. They emphasize Lovesac's unique approach in researching target demographics and operating like a consumer packaged goods brand. They also break down the company’s partnerships with Best Buy, online sales strategies, upcoming innovations, lessons from store openings, future plans for Lovesac, and more.