Are Day-Traders Moving the Markets?
During the pandemic, as many have been forced to remain at home, some analysts have traced a rise in day-trading activity, much of it coming from amateur investors who are using their forced quarantine time to indulge their speculative interests. Further evidence can be found in the popularity of trading apps like Robinhood, which now has 13 million users who are actively buying and selling, sometimes daily, an estimated $20 billion of personal assets. Additional indications come from the popularity of online searches such as “Top Robinhood Stocks to Buy,” or “Top 5 Penny Stocks on Robinhood to Watch” and similar topics.
Some believe that these traders are moving the markets, not necessarily because of their order flows, but because popular stocks on Robinhood are listed in the headlines. In addition, momentum algorithms at large brokerage firms amplify any small shifts in the popularity of individual stocks, so when smaller investors buy and buy again, others follow the trend.
Most discount brokerage firms have now matched Robinhood’s $0 trading fee for stocks and ETFs. Robinhood receives almost half of its revenue from payment for order flow—that is, selling its trading business to whatever clearing firm is willing to pay the most. Notably, regulators have fined the company more than $1 million for failing to ensure that its customers receive the best price for orders.
But is this activity really moving the markets in any fundamental way? In February and March 2020, U.S. equity markets alone lost $11.5 trillion in market capitalization as prices tanked in response to the pandemic shutdown. Then, over ensuing months, that capitalization was regained—and then some—as prices rebounded and rose to new highs. For clarity, that’s “trillion” with a “T.” Certainly, the $20 billion attributable to Robinhood traders is a lot of money, but it’s less than 0.08% of the total market capitalization of the S&P 500 (just over $27 trillion as of October 31, 2020). The market capitalization of Netflix alone, currently over $200 billion, is almost ten times the daily volume represented by Robinhood traders.
It seems likely that the actual stir with day-trading applications like Robinhood may center on micro-capitalization stocks that few investors have actually heard of. For hobbyists, such dramatic swings in penny stocks are the stuff of ambition: finding and owning the next “breakout stock” makes for entertaining conversation in online chat rooms and with friends.
But such efforts hardly constitute a reliable foundation for long-term investing success. Instead, the best results for funding important goals like a secure retirement or a lasting legacy for future generations will typically be achieved by sticking to proven, evidence-based principles: broad diversification, holding quality assets over time, rebalancing when appropriate, and adhering to a strategy matched to the investor’s risk tolerance and stage in life. We work with our clients daily to construct investment and financial strategies built according to these principles. If you would like to investigate how this could help you, please contact us. To learn more about how we help investors filter out the “noise” to achieve investing success, you can read our whitepaper, “The Informed Investor,” by clicking here.