After a long slumber, Canadian retail investors are back as a powerful force. So powerful, in fact, the online systems they trade through can't seem to handle the demand.
This week, discount brokerages run by the country's largest financial institutions, including Royal Bank of Canada and Toronto-Dominion Bank, struggled to fix technical issues with their online investing portals – sites and apps retail investors use to buy and sell stocks. At times, the outages prevented users from even accessing their accounts.
The situation rankled many investors, who couldn't understand why they were blocked from logging in. Compounding the frustration, the banks have said little, other than briefly noting the outages were related to high use.
But officials in the brokerage industry say the outages mostly boil down to a simple – but crucial – problem: server space. Retail demand is so unexpectedly high, particularly for stocks in the marijuana industry, that it has become overwhelming.
The brokerages won't provide usage statistics, but according to the Investment Industry Regulatory Organization of Canada, which oversees trading activity, the volume of trades between Dec. 22 and Jan. 3 jumped 107 per cent from a year earlier. And of that surge, retail trading volumes jumped to 34 per cent of the total from 23 per cent.
The frenzy around marijuana stocks is also having an effect. The number of trades in marijuana stocks popped 145 per cent during the same time frame, relative to the week running Dec. 14 to 21.
And even when clients are not transacting, they keep logging in to watch the markets and do research. This type of activity can create just as many bandwidth problems for the servers as trading does. Demand from retail investors tends to spike at particular times – such as when the market opens and again around lunch. One day recently, one brokerage's user activity was already near full capacity before the market even opened at 9:30 a.m.
Theoretically, banks that make a billion dollars or more every quarter should not have trouble buying servers – but the situation is more complicated than that. For one, these institutions have been cutting costs for the past few years as they got leaner, in part to take on nimble fintech startups.
Servers are also expensive assets in a world where so many firms need them, because data is a critical commodity. Until now, it didn't seem economical for discount brokerages to have servers sitting around just in case.
And there were few signs retail investors were about to flock to the markets again in such a rush. After the flurry of retail demand for yield-driven securities such as real estate investment trusts and preferred shares, there hadn't been much of late to trigger a blizzard of mom-and-pop trading.
But that started to change in fall, 2017, when the S&P/TSX Composite Index started an ascent and hit new highs.
Booming valuations for cryptocurrencies and marijuana companies elevated this interest to a new level in the past few weeks. "If I get one more [question] about cannabis stocks today, I'll have to track down some Cypress Hill tracks," Chris Stephenson, a retail investor specialist at Steadyhand Funds, tweeted on Thursday. Cypress Hill made loud, aggressive music – good for venting some steam.
Until now, the outages have created minor public relations headaches for the brokerages, and the situation has been relatively manageable because the bull market has kept its legs. Should the market – or even a sector, such as marijuana – start to tank, the headaches could prove more painful.