Zero-fee brokerage Robinhood is named after the legendary outlaw who stole from the rich to give to the poor. However, a new study indicates the exact opposite is happening, with sophisticated traders exploiting Robinhood's "naive" investors.
Attention Induced Trading and Returns: Evidence from Robinhood Users, co-authored by behavioural finance experts Prof Brad Barber and Terrance Odean, notes half of Robinhood users are first-time investors and that they tend to be drawn to "attention-grabbing" stocks in the news.
As a result, herding takes place, with Robinhood investors flocking into the same stocks at the same time. This gets noticed by short-sellers, who then bet against these same stocks.
Betting against Robinhood users is a profitable business; the top stocks bought by Robinhood users fall by 5 per cent over the next month while the most extreme herding events see reversals of 9 per cent.
Free trading, it seems, can be a costly business.
