This is not the beginning of a joke. It is the premise of a new study that looks at how young investors in the high-profile trading app with $ 0 commissions were generating volatility and “noise” in the market long before the GameStop stock trading frenzy exploded in the headlines earlier this year. .
The shares held by many Robinhood investors had fewer trades and less price volatility when some users of the app were excluded due to platform crashes last year, according to researchers at Oklahoma State University and Emory University.
“Taken together, the results support the view that the popularity of zero-commission brokers has attracted a new type of uninformed stock market participant who, together, has negative effects on the quality of the market,” they wrote.
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“The results support the view that the popularity of zero-commission brokers has attracted a new type of uninformed stock market player.”
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“What is the Stock Market,” “What is the DJIA DJIA,
”And“ What is the S&P 500 SPX,
”They were the three most visited topics on the Robinhood FAQ page, which states that its mission is to expand access to markets.
Frequently asked questions commonly visited on other investment platforms include “What are stock splits” and “What are put options and call options”, noted the article, which has not yet been peer-reviewed.
When at least some of Robinhood’s users were unable to trade because of platform issues, the stocks these Robinhood users generally owned “became more liquid, easier to trade and less expensive to trade and less volatile,” said the co. – author of the article Clifton Green from Emory University.
The research comes in the wake of a warning from Owen Lamont, associate director of multiset research at Wellington Management’s Quantitative Investment Group, that the GameStop saga illustrates the increase in the “noisy trading risk” that could fuel market volatility.
Green emphasized that he is not disparaging Robinhood users as a whole, but suggesting that those who trade too often, on average, probably shouldn’t. Green and his colleagues analyzed market conditions during 25 complaints of failure on the Robinhood platform between January 2020 and August 2020.
The researchers used Downdetector.com to detect an outage and at least 200 users had to report a problem. They also analyzed the conversation on Reddit’s WallStreetBets forum to assess what the trading plans would be if it weren’t for the platform problem.
Prescient Analysis
Without knowing it, the research was a prescient analysis of what was to come.
As of the end of January, GameStop GME shares,
had an absolute tear, powered by members of the Reddit forum. They skyrocketed from a price of $ 17 in early January to an intraday high of $ 483 at the end of the month. Then, prices soared to $ 90 in early February and closed Tuesday at $ 246.90.
Robinhood temporarily imposed trade restrictions on GameStop and AMC Entertainment AMC,
provoking the ire of retail investors.
Robinhood had to take action because the company’s warranty requirements skyrocketed, CEO and co-founder Vladimir Tenev told Congress at a subsequent hearing before the House of Representatives’ 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 ‘standard day traders’.
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Most of Robinhood’s 13 million customers are investors who buy and hold, Tenev said at the time. The average Robinhood user is 31 years old and has an average account balance of $ 240. Only 2% are “standard day traders”, according to Tenev, who rejects the idea that Robinhood is trying to turn the investment into a game.
The whole episode put markets “dangerously close” to “collapse”, said Thomas Peterffy, founder and president of Interactive Brokers Group.
The Senate Banking Committee on Tuesday had its own hearing on the wave of negotiations.
If it weren’t for the GameStop saga, Green said he and his colleagues joked that people would think his findings were “implausible – but now it’s obvious”.
“It’s good when the world conspires to make your research interesting,” he said.
“The stock market is a powerful wealth creator, but only half of American families invest,” said a spokeswoman for Robinhood. “We are proud to empower people from all backgrounds to manage their finances and focus on long-term investments.”
The survey also highlights another pending storyline in GameStop’s history: are regulations necessary to stem the future frenzy fueled by social media?
Green, a professor of finance at Emory University’s Goizueta Business School, does not have the answer. But, at least for now, he says he is inclined towards less regulation and more market access, combined with more financial education.
A MagnifyMoney survey interviewed young investors about where they get their investment information. 41% of the more than 1,500 people interviewed said they watch YouTube and 24% said they get tips from people on TikTok. 22% of the investors interviewed traded shares at least once a week.
35% of men up to 24 years old said they kept their investments in apps like Robinhood or Stash. 43% of men up to 40 years old said the same. 21% of women up to 24 years old said they used an app like Robinhood or Stash and 18% of women up to 40 years old said the same.
It is entirely possible that the majority of Robinhood users are investors who want to buy and maintain the investment over the long term, Green said. There may be only a few who are exerting an extraordinary influence with big bets and negotiations. “This does not negate the fact that they are moving the markets,” he said.