New research shows that the surge of market participation through the Robinhood platform has been driven by young, uninformed users who lack the skill to generate “alpha,” resulting in increased noise and volatility for all investors.
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The arrival of investing platforms with zero trading commissions and no account minimums has ushered in a new era of stock market participation. For example, Robinhood reported three million new accounts in the first quarter of 2020 alone.
Gregory Eaton, T. Clifton Green, Brian Roseman and Yanbin Wu, authors of the January 2020 study, “Zero-Commission Individual Investors, High Frequency Traders, and Stock Market Quality,” examined data from Robinhood to explore the financial market implications of commission-free individual investors. They began by noting that retail investors now account for about 20% of daily trading. Their data sample covered the period July 2018 through August 2020 and more than four million trades. Before reviewing their findings, it’s worth noting that the three most popular Robinhood FAQs, an indication of the level of financial literacy, are: “What is the stock market?” “What is the DJIA?” and “What is the S&P 500?”
Following is a summary of their findings:
- Investors drawn to zero commissions and user-friendly trading platforms tend to be younger (average age 31) and less wealthy (average account balance between $1,000 and $5,000) than retail investors of the 1990s (average age 50 and average balance of almost $50,000, not adjusted for inflation).
- Robinhood users tend to invest in volatile stocks and equities with more high-frequency trading.
- Robinhood investors trade after other retail traders.
- There is no evidence that changes in Robinhood ownership predict future returns – Robinhood traders are “noise” traders, not informed traders.
Read the full article here by Larry Swedroe, Advisor Perspectives
