It’s not the start of a joke. It’s the premise of a new study that looks at how young investors in the high-profile trading app with $ 0 commissions were generating market volatility and “noise” long before the GameStop stock trading frenzy put in the headlines earlier this year.
According to researchers at Oklahoma State University and Emory University, the shares of many Robinhood investors had fewer trades and less price volatility when some users of the app were left off the platform due to platform interruptions. last year.
“Overall, the findings support the view that the popularity of zero commission brokers has attracted a new type of equity market participant that, 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 type of uninformed equity market participant.”
”
“What is the stock market”, “What is the DJIA DJIA,
“I” 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 market access.
Frequently asked questions from other commonly visited investment platforms include “What are stock divisions” and “What are calls and calls”?
When at least some of Robinhood users were unable to trade due to platform issues, stocks that Robinhood users used to own “become more liquid, easier to trade and less expensive and less volatile,” the paper’s co-author said. Emory University.
The investigation stems from a warning from Owen Lamont, associate director of multi-set research at Wellington Management’s Quantitative Investment Group, that the GameStop saga illustrates the growing “risk of the noise trader” that could fuel market volatility .
Green emphasized that he doesn’t underestimate Robinhood users in general, but suggests those who market very often, on average, probably shouldn’t. Green and colleagues examined market conditions during the 25 Robinhood platform cutting complaints between January 2020 and August 2020.
Investigators used Downdetector.com to detect an outage and at least 200 users had to report a problem. They also reviewed the conversations on Reddit’s WallStreetBets forum to assess what the business plans might have been if it weren’t for the platform issue.
Precise analysis
Unbeknownst to him, the investigation was a mandatory analysis of what was about to come.
As of the end of January, GameStop GME shares,
an absolute tear continued, fueled by members of the Reddit forum. They went from a price of $ 17 in early January to an intraday high of $ 483 later that month. Then, prices dropped to $ 90 in early February and closed Tuesday at $ 246.90.
Robinhood temporarily imposed commercial restrictions on GameStop and AMC Entertainment AMC,
provoking the wrath of retail investors.
Robinhood had to take the step because the firm’s collateral requirements skyrocketed, Deputy CEO and co-founder Vladimir Tenev said 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 “day pattern traders”.
”
Most of Robinhood’s 13 million customers are buying and holding investors, Tenev said at the time. The average Robinhood user is 31 years old and has an average account balance of $ 240. Only 2% are “pattern traders,” according to Tenev, who rejects the idea that Robinhood is trying to turn investment into a game.
The whole episode put the markets “dangerously close” to the “collapse,” said at the time Thomas Peterffy, founder and president of Interactive Brokers Group.
The Senate Banking Committee had its own hearing on the trade march on Tuesday.
If it weren’t for the GameStop saga, Green said he and his colleagues joked that people would think their findings were “unlikely, 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 barely half of American households invest,” a Robinhood spokeswoman said. “We are proud to empower people from all walks of life to manage their finances and focus on long-term investment.”
The research also highlights another pending plot in the history of GameStop: are regulations needed to curb future frenzy fueled by social media?
Green, a professor of finance at Goizueta Business School at Emory University, has no answer. But at least for now, he says he is leaning toward less regulation and more market access coupled with greater 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 watched YouTube and 24% said they took directions from TikTok people. 22% of investors surveyed traded shares at least once a week.
35% of men up to the age of 24 said they kept their investment in apps like Robinhood or Stash. 43% of men under the age of 40 said the same. 21% of women up to the age of 24 said they used an app like Robinhood or Stash and 18% of women up to the age of 40 said the same thing.
It’s quite possible that most Robinhood users are long-term buy and hold investors, Green said. Some may be overly influential with big bets and trades. “That doesn’t negate the fact that they are moving markets,” he said.