Billionaires keep blaming Robinhood traders for skewing stock prices. But a new study shows the upstarts have minimal impact on the overall market.
REUTERS/Brendan McDermid
- The stock market has attracted a lot of new participants amid the COVID-19 pandemic, including retail traders who flocked to $0 commission trading apps like Robinhood.
- As Robinhood saw a surge in popularity, so did a third-party website that published data on the number of Robinhood accounts that own a particular stock: Robintrack.
- The publicity of what Robinhood traders were buying and selling often led to many well-known investors bemoaning their rise and their impact on the stock market.
- But one study released from Nick Maggiulli of Ritholtz Wealth Management shows that Robinhood traders don't have as big of an impact on the stock market as some may think.
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Amid the COVID-19 pandemic, the stock market saw a surge in new participants, as attention from many stuck at home with no sports to watch diverted to the market.
One beneficiary of this new trend was Robinhood, the $0 commission brokerage app that saw millions of new account openings amid the pandemic.
On top of that, Robintrack.net, a third-party website that published daily updates on the number of Robinhood accounts that own a particular stock, saw a surge in popularity.
This all put a target on the back of retail traders as a whole, as they were often blamed by seasoned investors for driving the stock market higher amid the sharpest economic decline since the Great Depression.
Billionaire investor Leon Cooperman said of the traders in July: "They are just doing stupid things, and in my opinion, this will end in tears."
But in reality, Robinhood traders have had little to no impact on the stock market overall, according to a study published by Nick Maggiulli, the chief operating officer at Ritholtz Wealth Management.
Maggiulli scraped the Robintrack website for data on the 200 most popular stocks owned on the platform, and compared that with their daily price moves to see if there was any relationship between a rise in a stock's popularity and its stock price.
Maggiulli wanted to test "whether an increase in Robinhood users holding a stock was met with a similar increase in that stock's price," according to the study.
The results? For most of the stocks studied, there was "little to no correlation" between the one-day change in a stock's price and the one-day change in a stock's popularity on Robinhood.
Ford, for example, the most popular stock on the Robinhood platform, had a correlation of near zero, meaning the daily change in Robinhood account ownership had no impact on the daily change in Ford's stock price.
But for some of the 200 most popular stocks on Robinhood, the correlation was higher than most, Maggiulli found.
Smaller, speculative names like Kodak, Nikola, and Hertz had a higher correlation than bigger companies like Amazon, Google, and Tesla.
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"Since these are higher market cap stocks, it's possible that even lots of volume from Robinhood traders can't move the market, compared to, say, a stock like Hertz, which is trending toward being worth $0," Maggiulli explained.
While Robinhood traders may have little to no impact on the overall stock market, they have had a sizable impact on headlines in the financial media space.
"Popularity on Robinhood is not predictive of price changes, but it is predictive of what will make the headlines," Maggiulli concluded.
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