This is not the beginning of a joke. This is the premise of a new study investigating how young investors in the high-profile trading app with $ 0 commissions generate market volatility and ‘noise’, long before the GameStop frenzy for stock trading appeared in the news earlier this year.
Shares held by many Robinhood investors, according to researchers from Oklahoma State University and Emory University, had fewer transactions and less price volatility last year when some users of the app were left out due to platform disruptions.
“Collectively, the findings support the view that the popularity of brokers without commission has attracted a new kind of uninformed stock market participant that collectively has negative consequences for the quality of the market,” they wrote.
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“The findings support the view that the popularity of brokers with no commission has attracted a new kind of uninformed participants in the stock market.”
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‘What is the stock market’, ‘What is the DJIA DJIA,
”And“ What is the S&P 500 SPX,
”Were the three most visited topics on the page with frequently asked questions for Robinhood, who says it is his mission to broaden access to markets.
Frequently asked questions about other investment platforms include: “What is share split” and “What are terms and calls”, the newspaper noted, which has not yet been peer-reviewed.
When at least some of the Robinhood users were unable to trade due to platform issues, the shares that Robinhood users typically own became “more liquid, easier to trade and cheaper to trade and less volatile,” said Clifton Green, co. author of the paper, said. Emory University.
The research comes on the heels of a warning from Owen Lamont, co-director of multibattery research for the Quantitative Investment Group of Wellington Management, that the GameStop saga illustrates an increasing “noise trader risk” that could promote market volatility.
Green stressed that he does not despise Robinhood users at all, but he suggests that those who trade very regularly on average probably should not. Green and his colleagues looked at market conditions between 25 January 2020 and August 2020 during 25 Robinhood platform disruption complaints.
The researchers used Downdetector.com to detect an interruption and at least 200 users had to report a problem. They also reviewed chat on Reddit’s WallStreetBets forum to determine what the trading plans could have been if it were not for the platform issue.
Prescient analysis
Without knowing it, the research was a preliminary analysis of what was to come.
In early January, shares of GameStop GME,
went on an absolute tear, fueled by members of the Reddit forum. They rose from a price of $ 17 in early January to an intraday high of $ 483 later in the month. Prices swept to $ 90 by early February and closed at $ 246.90 on Tuesday.
Robinhood temporarily imposed trade restrictions on GameStop and AMC Entertainment AMC,
provokes the wrath of small investors.
Robinhood had to take the step because the firm’s security requirements had skyrocketed, CEO Vladimir Tenev, co-founder and co-founder, told Congress in a subsequent hearing before the Financial Services Committee.
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The average Robinhood user is 31 years old and has an average account balance of $ 240. Only 2% are ‘pattern day traders’.
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Tenev said at the time that most of Robinhood’s 13 million customers were buy-and-hold investors. The average Robinhood user is 31 years old and has an average account balance of $ 240. Only 2% are ‘pattern day traders’, according to Tenev, who reject the idea that Robinhood wants to turn investments into a game.
Thomas Peterffy, founder and chairman of Interactive Brokers Group, said at the time that the markets were ‘dangerously close’ to ‘collapse’.
The Senate Banking Committee held its own hearing on the trade dispute on Tuesday.
If it weren’t for the GameStop saga, Green said he and colleagues joked that people would think their findings were “unlikely – but it’s now obvious.”
“It’s nice when the world works together to make your research interesting,” he said.
“The stock market is a powerful creator of wealth, but barely half of American households invest,” a Robinhood spokesman said. “We are proud to empower people from all backgrounds to manage their finances and invest in the long term.”
The research also highlights another pending plot in the GameStop story: Are regulations needed to curb future madness on social media?
Green, a professor of finance at Emory University’s Goizueta Business School, did not have the answer. But for now, he says he is leaning towards less regulation and more market access coupled with more financial training.
A survey by MagnifyMoney surveyed young investors about where they get their investment information. 41% of the more than 1,500 people surveyed said they watch YouTube and 24% said they use the clues at TikTok. 22% of the surveyed investors traded stocks at least once a week.
35% of men up to the age of 24 said they kept their investments in programs like Robinhood or Stash. 43% of men up to 40 years said the same. 21% of women up to the age of 24 said they use an app like Robinhood or Stash, and 18% of women up to the age of 40 said the same.
It is quite possible that most Robinhood users are buy-and-hold investors who are eligible in the long run, Green said. These can only be some that exert great influence on big bets and transactions. “It does not ignore the fact that they are moving markets,” he said.