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.

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