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Robinhooders

Robinhooders

| November 23, 2020
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Do you know any Robinhooders?  They are the (mostly) young stock investors who use the extremely popular Robinhood app to buy and sell stocks.  Robinhood started the craze with a very easy to use app and commission-free trades.  Soon, seemingly every millennial was furiously trading on Robinhood.  Especially, it seems, trading the stocks that appear on the “Top Movers” list in the Robinhood app.  The stocks on that list are those that have gained thousands of Robinhood investors and are moving sharply higher – at least for today.  But what happens then?  Well, a newly-released study shows that stocks that move sharply higher when thousands of Robinhooders pile in are very likely to sharply decline soon after.  And those same stocks draw the attention of short sellers, who move in to capitalize on the high probability of a price decline or collapse.  The chart on the left below shows price declines in the days following a pile-on of Robinhooders, and the chart on the right below shows how short sellers – far more sophisticated and deep-pocketed than the typical Robinhooder – move in for the kill.  That chart shows the short-sellers don’t stay around for long, but long enough to profit from the highly-probable price decline. (Source: “Attention Induced Trading and Returns: Evidence from Robinhood Users”, ssrn.com abstract id 3715077)

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