Trading On margin

Margin Loan Data Shows Australian ‘Army of Day Traders’ Growing Strong

Margin loan data shows Australian traders are leveraging to buy stocks in record numbers.

The data is compiled quarterly by the RBA, and analysis by CBA strategists Martin Whetton and Philip Brown has revealed some notable post-Covid trends.

After a sharp drop in March 2020, the total amount of margin loans increased sharply to a new record of nearly $ 20 billion:

Source: ABC

Margin loans – the allocation

Margin loan allows a trader to take out a loan for investment purposes, using their current stock portfolio or cash position as collateral.

If the share price falls, the amount of the loan may exceed a determined maximum amount, compared to the value of the shares used as collateral (loan / value ratio).

In this case, the user will have to add more money or sell some of their stock to meet LVR requirements – sometimes within a very short period of time.

Recourse to debt can therefore amplify returns on investment, but it is also riskier.

Whetton and Brown used the March 2020 stock market crash as an example of what happens when things take a pear shape.

To use r / wallstreetbets jargon, traders using pre-Covid leverage “were destroyed”:

Source: ABC

In a very short time, over 7,000 margin loans were called up, meaning traders had to shell out more money to reduce their LVR.

If they could not do so, some or all of the shares they bought using leverage would have been sold automatically.

The army of traders

Ever since central banks activated stimulus and governments came to the party with fiscal firepower, post-Covid markets have been largely defined by a healthy dose of risk appetite.

Combined with home orders and higher savings rates, “the army of day traders has grown tremendously,” CBA said.

The increase in margin lending activity has also been accompanied by an increase in the number of new registrations to retail applications such as Commsec and Marketech.

While margin lending activity has increased, strong gains in equity markets mean that the securities underlying lending have also risen sharply, the ABC noted.

In a sense, this creates a positive feedback loop, where traders can use their high asset balances as a basis for increasing leverage and buying more stocks.

“This is a pretty positive wealth effect for spending, home purchases and retirement balances,” Whetton and Brown said.

The chart above also shows an equally strong increase in margin lending in 2019.

In just 12 months before the COVID-19 crash, the amount of margin loans in Australia nearly doubled – from $ 11 billion to $ 19 billion – after declining in the previous year .

This increase in margin lending follows a key policy change by the U.S. Fed, which began cutting rates after a major market correction in December 2018.

In response, the RBA also cut rates three times – from 1.5% to 0.75% – following a multi-year period of forward-looking guidance during which the bank predicted that the next move in rate would likely be on the rise.

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