New Study Analyzes How Electronic Trading Is Changing the Retail Investment Market

The decades-long switch from human-centered to electronic-based trading has changed the ways investors participate in and access financial markets. In a new article, researchers analyze how technology has shaped the retail investment market in the United States. While retail investors have seen dramatic drops in costs, hurdles remain in specific markets. The article addresses the implications of the changes for regulations and regulatory oversight.

Written by Chester S. Spatt, Professor of Finance at Carnegie Mellon’s Tepper School of Business, and Thomas H. Ernst, Assistant Professor of Finance at the University of Maryland (UMD) Robert H. Smith School of Business, the article, “Retail Investors and Trading Execution,” appears in the Annual Review of Financial Economics.

After providing an overview of the regulatory setting for retail investing, the article’s authors discuss the wide variety of individuals classified as retail. These range from individuals making small purchases to retail brokers serving wealthy clients and trades by mutual funds. They then consider specific markets, including equity and option markets, which have changed dramatically. And they address relatively new markets for retail investors, including cryptocurrencies and prediction markets, both of which have implications for regulatory issues.

“The boom in retail trading, fueled in part by zero-commission trading and the COVID-19 pandemic, has led to renewed scrutiny of retail brokers and trade execution, with the U.S. Securities and Exchange Commission (SEC) adopting rules to enhance disclosure of retail equity trading costs,” explains Spatt, who coauthored the article.

Historically, the SEC has developed protections for retail investors through its own rule-making and that of the Financial Industry Regulatory Authority, the authors note. As retail participation in commodity markets, overseen by the Commodity Futures Trading Commission (CFTC), has grown, this raises the question of whether enhanced protections will be developed for retail investors or whether the SEC will collaborate with other bodies to extend existing securities market protections to some commodity markets.

“There have been big changes in the opportunities available to retail investors as a result of advances in technology, lower trading costs, and enhanced competition and transparency in traditional markets,” notes Ernst, coauthor of the article. “These changes have led to significant increases in market participation and trading activity in some markets, which raises questions about regulation.”

The authors conclude that while technological advancements have dramatically lowered trading costs and expanded market participation for retail investors across traditional and emerging asset classes, they also introduce persistent structural hurdles and complex regulatory challenges regarding jurisdictional oversight and investor protection.

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Summarized from Thomas H. Ernst, Chester S. Spatt. 2026. Retail Investors and Trading Execution. Annual Review of Financial Economics. 18:In press. https://doi.org/10.1146/annurev-financial-111424-124712