This is not the beginning of a joke. It is the premise of a new study on how young investors in the profile trading application with commissions of 0 USD generated market volatility and “noise” long before the frenzy of trading GameStop shares appeared in stocks earlier this year.
Shares held by many Robinhood investors had fewer transactions and less price volatility when some users of the app were removed by platform interruptions last year, according to researchers at 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 participant in the equity market which, as a whole, has negative effects on market quality,” they wrote.
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“The findings support the view that the popularity of zero commission brokers has attracted a new type of uninformed participants to the equity market.”
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“What is the stock market”, “What is DJIA DJIA,
”And“ What is the S&P 500 SPX,
“These were the three most frequently visited topics on the Robinhood FAQ page, which says its mission is to expand market access.
Frequently asked questions frequently visited on other investment platforms include “What are stock divisions” and “What are calls and appeals”, the paper mentioned, which is not yet evaluated by colleagues.
When at least some Robinhood users were unable to trade due to platform issues, the stocks they typically hold “all become more liquid, easier to trade and less expensive and less volatile,” he said. -author, Clifton Green, Emory University.
The research comes on the heels of a warning from Owen Lamont, associate director of multi-asset research for Wellington Management’s Quantitative Investment Group, that the GameStop saga illustrates the “risk of trading noise” that could fuel market volatility.
Green pointed out that he does not despise Robinhood users as a whole, but suggests those who trade very often, on average, probably shouldn’t. Green and his colleagues analyzed market conditions during the 25 complaints of the Robinhood platform disruption 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 analyzed the discussions on the RedSit WallStreetBets forum to assess what the trading plans might have been if it were not for the platform.
Mandatory analysis
Unbeknownst to him, the research was an early analysis of what was to come.
As of the end of January, GameStop GME shares,
an absolute tear continued, fueled by members of the Reddit forum. They started to move from a price of $ 17 in early January to an intraday high of $ 483 later in the month. Then, prices rose to $ 90 by early February and closed at $ 246.90 on Tuesday.
Robinhood has temporarily imposed trading restrictions on GameStop and AMC Entertainment AMC,
causing the anger of retail investors.
Robinhood had to take this step as the company’s collateral requirements increased, CEO and co-founder Vladimir Tenev said at a subsequent hearing before the House Financial Services Committee.
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The average Robinhood user is 31 years old and has an average balance of $ 240. Only 2% are “model traders”.
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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 an average balance of $ 240. Only 2% are “model traders,” according to Tenev, who rejects the idea that Robinhood is trying to turn the investment into a game.
The whole episode put the markets “dangerously close” to “collapse”, said then Thomas Thomasffy, founder and president of the Interactive Brokers Group.
The Senate Banking Committee had its own hearing on the trading game on Tuesday.
If it weren’t for the GameStop saga, Green said he and his colleagues joked that people would think their findings were “unbelievable – but now it’s obvious.”
“It’s nice when people conspire to make your research interesting,” he said.
“The stock market is a strong wealth creator, but only half of US households are investing,” a Robinhood spokeswoman said. “We are proud to empower people from all walks of life to manage their finances and focus on long-term investments.”
The research also highlights another pending plot in the GameStop story: Are regulations needed to reduce future social media frenzy?
Green, professor of finance at Emory University’s Goizueta Business School, has no answer. But, at least for now, he says he is leaning toward fewer regulations and more market access, which is associated with more financial education.
A MagnifyMoney survey asked young investors where they get their investment information. 41% of the more than 1,500 people surveyed said they were watching YouTube and 24% said they were taking clues from people on TikTok. 22% of the surveyed investors traded shares at least once a week.
35% of men up to the age of 24 said they own their investments in applications such as Robinhood or Stash. 43% of men under the age of 40 said the same thing. 21% of women under 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 thing.
It is entirely possible that most Robinhood users will be long-term buy-and-hold investors, Green said. There may be only a few who exert excessive influence with high bets and transactions. “That does not deny that it is moving in the markets,” he said.