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Attention-Induced Trading and Returns: Evidence from Robinhood Users

Journal: Journal of Finance

Date: 20221201

Author: Barber, Brad M.; Huang, Xing; Odean, Terrance; Schwarz, Christopher

Abstract:
We study the influence of financial innovation by fintech brokerages on individual investors' trading and stock prices. Using data from Robinhood, we find that Robinhood investors engage in more attention-induced trading than other retail investors. For example, Robinhood outages disproportionately reduce trading in high-attention stocks. While this evidence is consistent with Robinhood attracting relatively inexperienced investors, we show that it is also driven in part by the app's unique features. Consistent with models of attention-induced trading, intense buying by Robinhood users forecasts negative returns. Average 20-day abnormal returns are -4.7% for the top stocks purchased each day.

Link: Google Scholar

Background and Context

Study Setting

Robinhood was the first fintech brokerage to offer commission-free trading on a convenient mobile app, attracting 13 million users by May 2020 with half being first-time investors.

Research Focus

The study examines how Robinhood's simplified app interface and user-friendly features influence trading behavior and stock returns during May 2018 to August 2020.

Methodology

Researchers analyzed aggregate Robinhood user changes at the stock-day level, platform outages, and return patterns around herding events when many users buy the same stock.

Higher Concentration of Trading Activity by Robinhood Users vs Other Retail Investors

  • Robinhood users concentrate 35% of buying in just 10 stocks compared to 24% for other retail investors
  • Selling is also more concentrated among Robinhood users at 25% vs 14% for other retail traders
  • Shows Robinhood users engage in more correlated trading behavior

Negative Returns Following Robinhood Herding Events

  • Stocks experience significant negative returns after Robinhood herding events
  • Returns decline by approximately 4.7% over 20 days following herding
  • Pattern suggests price pressure from coordinated buying reverses over time

Impact of Robinhood Outages on Retail Trading Volume

  • Robinhood outages caused larger trading volume declines in popular and high-attention stocks
  • Shows Robinhood users are responsible for significant portion of retail trading volume
  • Particularly strong effect in stocks that receive high attention from users

Increasing Magnitude of Losses with Herding Intensity

  • Larger user increases during herding events lead to more negative subsequent returns
  • Returns range from -1.8% for modest herding to -19.6% for extreme events
  • Demonstrates strong relationship between herding intensity and price reversals

Increased Short Selling Around Herding Events

  • Short sellers significantly increase positions in stocks experiencing Robinhood herding
  • Suggests sophisticated investors anticipate price reversals
  • Indicates other market participants actively trade against Robinhood user behavior

Contribution and Implications

  • Documents how simplified trading interfaces can influence investor behavior and market prices
  • Shows that making trading "friendly and approachable" can lead to correlated trading and losses
  • Highlights importance of how information is displayed to retail investors
  • Demonstrates that other market participants profit from predictable retail trading patterns

Data Sources

  • Concentration chart based on Table III showing retail trading concentration metrics
  • Returns chart based on Table VIII showing event-time abnormal returns
  • Outage impact chart based on Table V showing effects of platform outages
  • Herding intensity chart based on Figure 7 showing returns vs user ratio cutoffs
  • Short selling chart based on Table XIII showing abnormal short volume around events