Robinhood users get a lot of attention these days. Some view them as uninformed traders, others argue they outperformed many professionals off the lows of 2020. Researchers have recently run the data, and this is what they found.
The paper is ‘Attention Induced Trading and Returns: Evidence from Robinhood Users’ by Brad Barber, Xing Huang, Terrance Odeon and Christopher Schwartz using data from Robintrack and published in November 2020.
Robinhood is a significant force in retail trading. The researchers estimate that in mid-2020 Robinhood has more users than the seasoned trading platforms of Schwab or E-Trade. However, more relevantly than user names Robinhood users trade a lot, forty times as many shares are traded by Robinhood users as Schwab customers according to the research. That’s despite Robinhood having a much smaller lead in customer numbers.
The researchers focused on so-called herding events on the Robinhood platform where users invest in a smaller stocks, those with market caps of under a billion dollars, that are disproportionately popular on the app that day. This is quite common on Robinhood as daily trading can be disproportionately focused on just a few stocks compared to other trading platforms. The researchers found nine of these so-called herding events a day, on average.
These herding stocks can often by listed prominently within the app’s lists. Inclusion on these lists that are associated with herding, can be related to extreme up or down price movements. It should be noted that as a tech company, Robinhood is constantly evolving its app, though the ‘most popular’ and ‘daily movers’ list as focused on in the research are still present at the time of writing.
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The effect of attention from Robinhood can be material. A herding day on Robinhood, as the researchers define it, can see a stock up 14% or sometimes much more. However, despite the short-term reaction, this generally does not end well and these stocks then lose an average of 5% over the next month, stocks with more extreme gains, can also see slightly larger loses over subsequent days on average.
Where do these gains and losses net out? Well, on average, the researchers find that the typical Robinhood user loses from these events. The researchers found almost 5,000 of these herding events, and money was lost both on average and in about two thirds of cases. This is in part because a lot of the price surge tends to occur close to the open, causing many investors to miss out on the bulk of gains that happened quickly, but still incur the subsequent losses which took longer.
It appears smart money may be taking notice, and not for the benefit of Robinhood traders. Short selling activity can increase by a factor of three or more during these Robinhood herding events.
However, other researchers have not found that Robinhood users underperform the market, even though about half of Robinhood users are new investors. Two other studies have found returns to Robinhood traders are similar to the overall market.
What’s unique about this study is it’s focus on herding events on the platform – days when a lot of Robinhood investors are making the same trade. Also, stock performing poorly after attention-grabbing events isn’t just confined to the Robinhood platform.
Similar patterns have been observed with Jim Cramer’s stock picks, certain Wall Street Journal coverage, Google Search activity and repeated news. So this is perhaps another example of where disproportionate attention on a stock can cause subsequent underperformance, rather than anything too unique to Robinhood or its users.
Robinhood users are becoming a major force in trading volumes compared to other retail platforms, but when that results in short-term herding behavior on smaller stocks, it does not typically tend to end well.
That said, this phenomenon likely has more to do with the issues with herding and excessive attention to specific stocks than Robinhood itself, as the same issue can be observed in other trading situations beyond just the Robinhood app.