That is not the beginning of a joke. It’s the premise of a new study looking at how young investors in the high-profile $ 0 fee trading app were creating volatility and “noise” in the market long before GameStop’s stock trading frenzy erupted into the headlines earlier this year.
Shares of many Robinhood investors had fewer trades and less price volatility when some users of the app were sidelined by platform outages last year, according to researchers from Oklahoma State University and Emory University.
“Taken together, the findings support the view that the popularity of zero-commission brokers has attracted a new type of uninformed stock market participant who, taken together, has negative effects on market quality,” they wrote.
“The findings support the view that the popularity of zero-commission brokers has attracted a new kind of uninformed stock market participant.”
“What is the stock market”, “What is the DJIA DJIA,
“And” What is the S&P 500 SPX?
”They were the top three most visited topics on Robinhood’s FAQ page, which says its mission is to expand access to markets.
The most visited FAQs on other investment platforms included “What are stock splits?” And “What are put and put options?” Noted the document, which has not yet been peer-reviewed.
When at least some of Robinhood’s users were unable to trade due to platform issues, the shares that Robinhood users commonly owned “become more liquid, easier to trade, and less expensive to trade and less volatile,” said the co-author. from the article Clifton Green of Emory University.
The investigation comes on the heels of a warning from Owen Lamont, associate director of multi-pool research at Wellington Management’s Quantitative Investment Group, that the GameStop saga illustrates the growing “risk of merchant noise” that could fuel market volatility. market.
Green emphasized that he is not looking down on Robinhood users in general, but suggested that those who trade very frequently, on average, probably shouldn’t. Green and his colleagues observed market conditions during 25 Robinhood platform outage complaints between January 2020 and August 2020.
The researchers used Downdetector.com to detect an outage and at least 200 users needed to report a problem. They also reviewed the talk on Reddit’s WallStreetBets forum to assess what the business plans might have been were it not for the platform issue.
Unknowingly, the investigation was a prophetic analysis of what was to come.
As of the end of January, the shares of GameStop GME,
burst into an absolute tear, spurred on by members of the Reddit forum. They spiked from a price of $ 17 in early January to an intraday high of $ 483 later in the month. Then prices rose to $ 90 in early February and closed at $ 246.90 on Tuesday.
Robinhood temporarily imposed trade restrictions on GameStop and AMC Entertainment AMC,
provoking the ire of retail investors.
Robinhood had to take the plunge because the company’s collateral requirements soared, CEO and co-founder Vladimir Tenev told Congress at a subsequent hearing before the House Financial Services Committee.
The average Robinhood user is 31 years old and has an average account balance of $ 240. Only 2% are “pattern day traders”.
The majority of Robinhood’s 13 million clients are buy-and-hold investors, Tenev said at the time. The average Robinhood user is 31 years old with an average account balance of $ 240. Only 2% are “pattern day traders,” according to Tenev, who rejects the idea that Robinhood is trying to turn investing into a game.
The whole episode put markets “dangerously close” to “collapse,” said Thomas Peterffy, founder and president of Interactive Brokers Group at the time.
The Senate Banking Committee held its own hearing on the trade wave on Tuesday.
If it weren’t for the GameStop saga, Green said he and his colleagues joked that people would think their findings were “implausible, but now it’s obvious.”
“It’s nice when the world conspires to make your research interesting,” he said.
“The stock market is a powerful wealth creator, but only 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 investing for the long term.”
The research also highlights another pending plot in GameStop’s history: Are regulations needed to curb future frenzy fueled by social media?
Green, a finance professor at Emory University’s Goizueta School of Business, doesn’t have the answer. But at least for now, he says he is leaning toward less regulation and more market access combined with more financial education.
A MagnifyMoney survey 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 follow people’s signals on TikTok. 22% of investors surveyed traded stocks at least once a week.
35% of men up to age 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 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 quite possible that the majority of Robinhood users are investors who buy and hold for the long term, Green said. It could be just a few who are wielding a big influence with big bets and trades. “That doesn’t negate the fact that the markets are moving,” he said.