This is not the beginning of a joke. That’s the premise for a new study that looks at how young investors were in the high-profile trading app with commissions of $ 0 Create market volatility and “noise” long before the GameStop stock trading frenzy hit the headlines earlier this year.
Stocks held by many Robinhood investors had fewer trades and less volatility when some users of the app dropped out due to platform outages over the past year, according to researchers at Oklahoma State University and Emory University.
“Taken together, the results support the view that the popularity of no-commission brokers has attracted a new type of uninformed stock market participant that has an overall negative impact on market quality,” they wrote.
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“The results support the view that the popularity of zero-commission brokers has attracted a new breed of uninformed stock market participants.”
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“What is the stock market?” “What is the DJIA?
DJIA, + 0.90%,
“And” what is the S&P 500
SPX, + 0.10%
“Were the three most visited topics on the Frequently Asked Questions page for Robinhood, which is about expanding access to markets.
Frequently visited FAQs on other investment platforms included “What are stock splits?” And “What are puts and calls?” Noted the paper, which has not yet been peer-reviewed.
When at least some of the Robinhood users have been unable to trade due to platform issues, the stocks these Robinhood users traditionally owned will become “more liquid, easier to trade, cheaper to trade, and less volatile,” said Clifton Green, co-author of the paper from Emory University.
The study follows a warning from Owen Lamont, associate director of multi-asset research at Wellington Management’s Quantitative Investment Group, that the GameStop saga illustrates the surge. “Noise trader riskThis could add to the volatility of the market.
Green stressed that he is not belittling Robinhood users as a whole, but rather those who trade on average very often should probably not. Green and his colleagues examined market conditions during 25 complaints about the Robinhood platform failure between January 2020 and August 2020.
The researchers used Downdetector.com to detect an outage and had at least 200 users report an issue. They also checked the chatter on Reddit’s WallStreetBets forum to see what the trading plans might have been without the platform issue.
Predictive analysis
Without knowing it, the research was predictive analysis of what was to come.
GameStop shares from the end of January
GME, + 1.73%
went on an absolute tear, fueled by members of the Reddit forum. They rose from a price of $ 17 in early January to an intraday high of $ 483 later in the month. Then prices dropped to $ 90 in early February Closed on tuesday at $ 246.90.
Robinhood has temporarily imposed trade restrictions on GameStop and AMC Entertainment
AMC + 8.56%,
provoke the anger of private investors.
Robinhood had to make the move because The demands on the company’s collateral increased, CEO and co-founder Vladimir Tenev, told Congress in 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 balance of $ 240. Only 2% are “Pattern Day Traders”.
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Most of Robinhood’s 13 million customers are buy and keep Investors, Tenev said at the time. The average Robinhood user is 31 years old and has an average balance of $ 240. Only 2% are pattern day traders, according to Tenev, who rejects the idea that Robinhood is trying to turn investments into a game.
The whole episode brought markets “dangerously closeThomas Peterffy, founder and chairman of the Interactive Brokers Group, said at the time.
The Senate Banking Committee had its on Tuesday own hearing on the trading frenzy.
If it weren’t for the GameStop saga, Green and colleagues joked that people would think their results 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 barely half of US households are invested,” said a Robinhood spokeswoman. “We pride ourselves on empowering people of all backgrounds to manage their finances and focus on long-term investments.”
The research also highlights another upcoming plot in GameStop history: Are regulations needed to contain future social media frenzies?
Green, a finance professor at Emory University’s Goizueta Business School, has no answer. But at least for now, he says, he’s leaning towards less regulation and more market access that comes with it more financial education.
A MagnifyMoney survey Asked young investors where they get their investment information from. Of 1,500+ respondents, 41% said they watched YouTube and 24% said they took tips from people Tick tock. 22% of the investors surveyed traded stocks at least once a week.
35% of men up to the age of 24 said they had invested in apps like Robinhood or Stash. 43% of men under 40 said the same thing. 21% of women up to age 24 said they used an app like Robinhood or Stash, and 18% of women up to age 40 said the same.
It’s entirely possible that most of Robinhood’s users are buy-and-hold investors who are long-term investors, Green said. It might just be a few who make an oversized impact with big bets and trades. “That doesn’t negate the fact that they move markets,” he said.
