That is not the beginning of a joke. It is the premise of a new study looking at how young investors in the high-profile trading app with $ 0 commissions generated market volatility and “noise” long before GameStop stock trading blared in the headlines earlier this year.
According to researchers at Oklahoma State University and Emory University, stocks of many Robinhood investors had fewer trades and less price volatility when some users of the app were sidelined by platform outages last year.
“Taken together, the findings support the view that the popularity of zero commission brokers has attracted a new type of uninformed stock market participant that has an overall negative effect on market quality,” they wrote.
“The findings support the view that the popularity of commission-free brokers has attracted a new type of uninformed participant to the stock market.”
“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 FAQ page for Robinhood, which says its mission is to broaden access to markets.
Frequently-visited FAQs on other investment platforms included “What are stock splits” and “What are sinks and calls,” noted the paper, which has not yet been peer-reviewed.
When at least some of the Robinhood users were unable to trade due to platform issues, the stocks that Robinhood users commonly owned become “all more liquid, easier to trade and less expensive to trade and less volatile,” said co-author Clifton Green of Emory University.
The study follows a warning from Owen Lamont, associate director of multi-asset research for Wellington Management’s Quantitative Investment Group, that the GameStop saga illustrates rising “noise trader risk” that could fuel market volatility.
Green stressed that he doesn’t belittle Robinhood users as a whole, but suggests that those who trade on average often should probably not. Green and his colleagues looked at market conditions during 25 complaints of outages on the Robinhood platform between January 2020 and August 2020.
The researchers used Downdetector.com to track down an outage and at least 200 users had to report a problem. They also discussed chatter on Reddit’s WallStreetBets forum to gauge what the trading plans might have been had the platform issue not been there.
Cautious analysis
Without knowing it, the research was a forward-looking analysis of what was to come.
As of the end of January, GameStop GME shares,
went on an absolute tear, fueled by members of the Reddit forum. They skyrocketed from a price of $ 17 in early January to a intraday high of $ 483 later in the month. Then prices soared to $ 90 in early February and closed at $ 246.90 on Tuesday.
Robinhood has temporarily imposed trade restrictions on GameStop and AMC Entertainment AMC,
provoking wrath in retail investors.
Robinhood had to take the step as the company’s collateral requirements had skyrocketed, CEO and co-founder Vladimir Tenev told Congress in a subsequent hearing before the House of Representatives’ Financial Services Committee.
The average Robinhood user is 31 years old and has a median account balance of $ 240. Only 2% are “pattern day traders.”
Most of Robinhood’s 13 million customers are buy-and-hold investors, Tenev said at the time. The average Robinhood user is 31 years old and has a median account balance of $ 240. Only 2% are “pattern day traders,” said Tenev, who rejects the idea that Robinhood is trying to turn investing into a game.
The entire episode brought markets “dangerously close” to “collapse,” said Thomas Peterffy, founder and chairman of Interactive Brokers Group, at the time.
The Senate banking committee had its own hearing on the trade wave on Tuesday.
If it wasn’t for the GameStop saga, Green said he and his colleagues joked that people would think their findings were “implausible – but now it’s clear.”
“It’s nice when the world conspires to make your research interesting,” he said.
“The stock market is a powerful creator of wealth, but barely half of American households invest,” said a Robinhood spokeswoman. “We pride ourselves on empowering people of all backgrounds to manage their finances and focus on long-term investing.”
The investigation also highlights another pending plot in the GameStop story: Are regulations needed to curb future social media-driven insanity?
Green, a professor of finance at Emory University’s Goizueta Business School, doesn’t have the answer. But for now, he says he is leaning towards less regulation and more market access combined with more financial education.
A MagnifyMoney survey asked young investors about where they get their investment information. 41% of the more than 1,500 respondents said they watch YouTube and 24% said they picked up people’s signals on TikTok. 22% of the investors surveyed traded stocks at least once a week.
35% of men under the age of 24 said they kept their investment in apps like Robinhood or Stash. 43% of men up to age 40 said the same. 21% of women up to 24 said they used an app like Robinhood or Stash, and 18% of women up to 40 said the same.
It’s very possible that most Robinhood users are long-term buy-and-hold investors, Green said. It may be some who exert an outsized influence with big bets and trades. “That does not alter the fact that markets are in motion,” he said.