Robinhood’s Frequently Asked Questions Reveal a ‘New Kind of Uninformed Stock Market Player’

Stocks held by many Robinhood investors had fewer trades and less price volatility when some app users were sidelined by platform outages last year, researchers at the ‘Oklahoma State University and Emory University.

“Taken together, the results support the idea that the popularity of zero commission brokers has attracted a new kind of uninformed player to the stock market which, overall, has negative effects on market quality,” they wrote.

“What is the stock market”, “What is the DJIA DJIA,
+ 0.10%,
“And” What is the S&P 500 SPX,
+ 1.42%
Were the three most frequently visited topics on Robinhood’s frequently asked questions page, which says its mission is to expand market access.

The most frequently viewed FAQs on other investment platforms included “What are stock splits” and “What are call and put options,” the document notes, which has yet to be published. is subject to peer review.

When at least some of the Robinhood users were unable to trade due to platform issues, the stocks these Robinhood users typically owned “all become more liquid, easier to trade and less expensive to trade and less volatile.” , said co-author of the article Clifton Green of Emory University.

The research follows a warning from Owen Lamont, associate director of multi-asset research for Wellington Management’s quantitative investment group, that the GameStop saga illustrates the rise of ‘noise trader risk’ that could fuel market volatility.

Green pointed out that he isn’t disparaging Robinhood users as a whole, but suggests those who trade very often, on average, probably shouldn’t. Green and his colleagues looked at market conditions during 25 Robinhood platform outage complaints between January 2020 and August 2020.

Researchers used Downdetector.com to spot an outage and at least 200 users were expected to report an issue. They also looked at discussions on Reddit’s WallStreetBets forum to assess what the trading plans might have been without the platform issue.

Prescious analysis

Without knowing it, the research was a premonitory analysis of what was to come.

From the end of January, the actions of GameStop GME,
+ 26.94%
had an absolute tear, fueled by members of the Reddit forum. They went from a price of $ 17 in early January to an intraday high of $ 483 later in the month. Then, prices climbed to $ 90 in early February and closed Tuesday at $ 246.90.

Robinhood has temporarily imposed commercial restrictions on GameStop and AMC Entertainment AMC,
+ 13.02%,
angering retail investors.

Robinhood had to take the plunge as the company’s collateral requirements exploded, CEO and co-founder Vladimir Tenev told Congress at a subsequent hearing before the House Financial Services Committee.

Most of Robinhood’s 13 million clients are buy-and-hold investors, Tenev said at the time. The average Robinhood user is 31 years old and has a median account balance of $ 240. Only 2% are “day traders,” according to Tenev, who rejects the idea that Robinhood is trying to turn investing into gambling.

The entire episode put markets “dangerously close” to “collapse,” said Thomas Peterffy, founder and chairman of the Interactive Brokers Group at the time.

The Senate Banking Committee held its own hearing on the trading frenzy on Tuesday.

Without 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 good when the world conspires to make your research interesting,” he said.

“The stock market is a powerful creator of wealth, but barely half of American households invest,” said a spokeswoman for Robinhood. “We pride ourselves on empowering people from all walks of life to manage their finances and focus on long-term investing.”

The research also highlights another pending plot in GameStop’s history: Are regulations needed to curb future social media-fueled frenzy?

Green, a finance professor at Goizueta Business School at Emory University, doesn’t have the answer. But for now at least, he says he’s leaning towards less regulation and more market access, coupled with more financial education.

A MagnifyMoney survey asked young investors where they got their investment information. 41% of the 1,500+ respondents said they watch YouTube and 24% said they follow people’s directions on TikTok. 22% of investors surveyed have traded stocks at least once a week.

35% of men up to the age of 24 said they had their investment in apps like Robinhood or Stash. 43% of men up to age 40 said the same thing. 21% of women under 24 said they used an app like Robinhood or Stash and 18% of women under 40 said the same.

It’s entirely possible that most Robinhood users are buy-and-hold investors who are committed for the long term, Green said. There may be some exerting disproportionate influence with big bets and trades. “It doesn’t negate the fact that they are moving markets,” he said.