Robinhood traders boosted the value of the stock market in the depths of the pandemic, but the rise of retail traders also means ‘extraordinary volatility’ may be the new normal, study says

Robinhood on cellphone
Robinhood app

Robinhood traders boosted the market’s recovery by adding 1% to the aggregate US stock market valuation in the second quarter of 2020, a study by the Swiss Finance Institute found. Traders also added 20% to the value of small-cap stocks.

The study, first reported by Bloomberg, also revealed that Robinhood traders had an impact five times the size of their assets in the second quarter. Retail traders on the platform, according to researchers Philippe van der Beck and Coralie Jaunin, also alleviated the stock market crash during the first quarter of last year by 0.6%. The paper was published in SSRN, a publisher of scholarly and academic research, in January 2021.

“The price impact of Robinhood traders is concentrated towards small-cap stocks and the consumer staples industry.” the pair wrote. “However, they are able to affect the price of some large companies, which are being held primarily by passive investors.”

The pair concluded that individual retail investors react more strongly to price changes.

“We show that when institutions react sluggishly to non-fundamental price changes, the mechanism stifles and retail demand shocks can have substantial impacts on stock prices,” the pair wrote.

Moving forward, the researchers found that if the role of Robinhood, “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.

The rapid rise of retail investors has been a powerful force in the stock market, enabled by a range of factors including commission-free trading, distribution of government stimulus checks, and heightened pandemic boredom as many people continue to work from home.

Read the original article on Business Insider

The next stimulus will drive another surge of retail investing in the stock market, Bank of America says

GettyImages 1291817095
Robinhood is hugely popular among day traders, putting it at the center of the GameStop frenzy

  • The next round of stimulus aid will drive another surge of retail investing, Bank of America said.
  • BofA data shows the last two spikes in trading app downloads coincided with the receipt of stimulus checks. 
  • A more broad-based stimulus will lead to a higher uptick of retail-investing, added BofA.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Retail investors have poured into the stock market in the last year, lured by comission-free trading, work from home conditions, stimulus checks, and high savings rates. Now, Bank of America says that it is expecting the next round of federal stimulus aid to drive another surge in retail investing.

“We expect another uptick in retail activity with another round of stimulus, though the level will likely depend on the type of stimulus (broad based or targeted), the market backdrop at the time, as well as any potential regulatory changes discussed over the coming weeks,” a team of BofA analysts said in a recent note. 

The firm found that the last two spikes in trading app downloads coincided with the receipt of stimulus checks. However, in both cases, there were extreme market moves (April 2020) and individual stock moves (January 2021) that helped draw investors.

If the next round of stimulus is broad based, BofA expects a higher level of retail activity, particularly as unemployment improves and many Americans are in better financial positions. President Joe Biden’s proposed $1.9 trillion stimulus plan includes $1,400 direct payments for individuals making up to $75,000 a year. 

Read more: Raymond James says buy these 12 ‘center of the storm’ stocks that are set to rebound as the economy reopens – including 6 that can outperform the S&P 500 in the coming months

While BofA expects retail engagement to moderate throughout 2021 following the stimulus as people spend more time and money away from home, the bank still expects structurally higher levels of retail activity versus 2019 because of zero commissions, new entrants, and advances in technology. 

In addition to a stimulus-boost, Bank of America’s data shows that the recent surge in retail trading has been led by young investors and social media.

Throughout 2020 and January 2021, brokerage firms E-Trade and TD Ameritrade saw a rising percentage of users aged 18-34, BofA said.

“It’s not just retail investors that may increasingly be a force in markets, its young retail investors,” BofA noted. “And while traditional news outlets did see a usage boost from the January surge in certain stocks, the boost was far bigger for Reddit, which tells you something about how these younger investors are obtaining views and information.” 

Bank of America found that Robinhood daily average users reached 8 million, up from an average of 4.5 million, at the height of the GameStop market-mania in late January. At the same time, conversations on the WallStreetBets Reddit forum climbed dramatically.

While Robinhood usage has come down from its January highs, it still remains elevated relative to before the GameStop frenzy, indicating that retail activity is here to stay, BofA added.

Screen Shot 2021 02 16 at 10.48.24 AM
savings rate stimulus stocks bofa chart

Read more: Biden’s ESG push is a huge opportunity for asset managers. Firms like BlackRock and Fidelity are making hires, boosting tech tools, and launching new products to capture it.

Read the original article on Business Insider