Robinhood Traders Pack a Punch Five Times Their Assets

Robinhood Traders Pack a Punch Five Times Their Assets

Individual investors had an impact five times the size of their assets in the second quarter of 2020, says a new study from the Swiss Finance Institute. This according to a recent article in Bloomberg.

“Robinhood demand substantially alleviated the negative returns observed in the first quarter,” the paper stated, adding, “the return effects of Robinhood demand are even more pronounced during the recovery.”

The researchers found that even though traders on the popular app only accounted for .2% of total U.S. market capitalization, they accounted for 10% of the variation in stock returns in the second quarter of last year. They noted that this is probably because smaller investors react more strongly to price changes than their institutional counterparts.

The article reports that, according to the study, “While the impact of Robinhood traders is concentrated toward small cap stocks and the consumer staples industry, they are also able to affect the price of some large companies, which are being held primarily by passive investors.”

While retail activity provided liquidity to the U.S. stock market, the surge could lead to increased volatility going forward. The study states, “The prominent role of Robinhood traders in driving returns evokes concerns about the future role of retail trading in equity markets,” adding, “If—facilitated by novel fintech solutions—the retail sector continues to grow its wealth share, the extraordinary volatility observed during the pandemic may turn out to be the new normal.”