Robinhood has quickly become one of the most popular broker platforms among individual investors, with over 13 million users in May 2020 compared to 12.7 million at Charles Schwab. Popularity, however, does not correlate with successful investing, according to a study published in the Journal of Finance. The average 20-day abnormal return is –4.7% for the top 0.5% of stocks traded each day, as listed on the Robintrack website.

Robinhood created an easy-to-use, commission-free, app-based platform that was attractive to retail investors who had little to no experience investing. Robintrack published stock popularity data until Robinhood stop making it available in August 2020.

Researchers were able to use the data to analyze returns and trading behavior. They were particularly interested in Robinhood users who were less likely to have a defined investment strategy and were perceived as being heavily influenced by external factors. The combination created a speculative trading environment.

Robinhood investors also have, on average, smaller accounts than investors at other brokerages. Yet, during the first three months of 2020 alone, Robinhood users traded 40 times as many shares as Charles Schwab users, per dollar in the average account. This extreme turnover rate is an environment where a much smaller proportion of funds are being allocated to non-speculative investment purposes such as rebalancing portfolios, saving for retirement or meeting liquidity needs.

Robinhood users also concentrate their funds at a much higher rate than the average retail investor. Thirty-five percent of purchases by Robinhood users is focused in just 10 stocks, versus 24% for most individual investors. This behavior was labeled as “herding” by the researchers—when the number of users holding a specific stock increased dramatically in one day. These herding events have led to possible price reversals and negative returns in the following weeks.

The researchers speculate that Robinhood has been able to amass such a large user base due to the perfect storm of increasing retail investors during the pandemic and the simplicity of the Robinhood app itself. By allowing novice traders such easy access to the markets, Robinhood has arguably fostered an era of extreme speculation and emotional investing. So far, these novice investors have not fared well investing.

Source: “Attention-Induced Trading and Returns: Evidence from Robinhood Users” by Brad M. Barber, Xing Huang, Terrance Odean and Christopher Schwarz; Journal of Finance, October 2021.

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