Robinhood, is the hottest online trading app of 2020. This online trader pushed the market’s recovery. Particularly, after adding 1% to the aggregate U.S. stock valuation in the 2nd quarter. According to research by the Swiss Finance Institute, Robinhood traders contributed 20% to the value of small-cap stocks.
Bloomberg first reported the study which revealed the online trading platform made an impact 5 times the size of its total assets in the 2nd quarter. According to researchers Philippe Van der Beck and Coralie Jaunin, online traders also contributed negatively to the market. They caused a crash during the 1st quarter of the same year by about 0.6%. The findings were first published in SSRN, the scholarly and academic research platform in January 2021.
The price impact of Robinhood traders remains concentrated towards small-cap stocks and the consumer staples industry. They are able to affect the price of some large companies. Primarily, passive investors hold these stocks.
Individual Traders on Robinhood React Sluggishly to Price Changes
Philippe and Jaunin wrapped up the research explaining individual traders’ reactions to price changes are more sluggish.
“We show that when institutions react sluggishly to non-fundamental price changes, the mechanism stifles. Retail demand shocks can have substantial impacts on stock prices,” the pair wrote.
The pair discovered the role of the online trading platform “facilitated by novel fintech solutions” continues to grow. The “extraordinary volatility observed during the pandemic may turn out to be the new normal.”
“The prominent role of Robinhood traders in driving returns evokes concerns about the future role of retail trading in equity markets,” the pair said.
Robinhood Financial LLC launched in 2013. The company soared in popularity amid the Covid-19 pandemic. The online trading platform filed for initial public offering with the Securities and Exchange Commission and raised over $660 million in a Series G funding round. Currently, Robinhood’s worth $11.7 billion as of February 2021. This, of course, is after raising another $3.4 billion in an investment round featuring Ribbit Capital.