Stonks go up, and down

In January the shares of a chain of video-game shops in Texas rose by as much as 1,600%.^{1PBS NewsHourWatch live: Robinhood CEO Tenev testifies at House Financial Services GameStop hearing18 Feb 2021} On 28 January Robinhood, the app through which many of the buyers had come, stopped its customers buying GameStop and about a dozen other stocks.^{1PBS NewsHourWatch live: Robinhood CEO Tenev testifies at House Financial Services GameStop hearing18 Feb 2021} Three weeks later its chief executive, Vlad Tenev, told a House committee that “what happened is unacceptable to us.”^{1PBS NewsHourWatch live: Robinhood CEO Tenev testifies at House Financial Services GameStop hearing18 Feb 2021} The question Congress asked, and the headlines before it, was what the young do when given a free trading app. We think it was the wrong question.

Start with the premise. The people in the story are not a single cohort. Robinhood is a brokerage for adults, and the evidence on the age of its customers is thinner than the commentary suggests. The hearing, titled “Game Stopped?”, heard from a Reddit chief executive, a hedge-fund manager, a market maker and a retail investor, Keith Gill, who said he profited by doing his own research and did not solicit others to buy or sell.^{1PBS NewsHourWatch live: Robinhood CEO Tenev testifies at House Financial Services GameStop hearing18 Feb 2021,5RevRobinhood CEO testimony transcript, GameStop hearing, February 1818 Feb 2021} None of them was a teenager. The “young trader” is a character in the play, not a witness.

The app that ate January. US downloads of brokerage and trading apps, January 2021, thousands

	Downloads (000)
Robinhood	3000
Coinbase	1300
Webull	800
TD Ameritrade	370
Fidelity	340
E-Trade	220
SoFi	121
Schwab	75

Source: JMP Securities, via CNBC, 3 February 2021²

The scale, though, is real. Robinhood was downloaded more than 3m times in January, its highest monthly total, according to JMP Securities. That was well over twice the 1.3m of Coinbase and roughly eight times the 370,000 of TD Ameritrade.^{2CNBC, via NBC Los AngelesRobinhood appears to be benefiting from the trading controversy, seeing record app downloads3 Feb 2021} On the Friday after the restrictions the app was downloaded more than 600,000 times, against about 140,000 on its best day in March 2020.^{2CNBC, via NBC Los AngelesRobinhood appears to be benefiting from the trading controversy, seeing record app downloads3 Feb 2021} Anger at a broker, it turns out, is a fine advertisement for a broker. “Robinhood has actually been adding a tremendous amount of new accounts,” said Devin Ryan, an analyst at JMP.^{2CNBC, via NBC Los AngelesRobinhood appears to be benefiting from the trading controversy, seeing record app downloads3 Feb 2021}

The more useful question is how such traders have actually done, and here the academic evidence points both ways. Ivo Welch of the University of California, Los Angeles, found that Robinhood investors added to their holdings during the sell-off of March 2020, did not panic, and were rewarded in the rally that followed. Their collective portfolio leaned towards stocks with high trading volume, mostly large companies, and showed good timing between mid-2018 and mid-2020.^{3National Bureau of Economic ResearchThe Wisdom of the Robinhood Crowd (NBER Working Paper 27866)1 Dec 2020} The charge of mindless gambling does not fit those facts.

A second paper, by Brad Barber of the University of California, Davis, and colleagues, fits better with the popular picture. Examining the same app, they find that Robinhood users trade heavily on attention, and that bursts of intense buying are followed by poor returns. A good deal of the herding seems to be shaped by what the app shows prominently on the screen, and not only by what its users know.^{4SSRNAttention Induced Trading and Returns: Evidence from Robinhood Users (draft)24 Nov 2020} The user is hardly the sole author of the mistake.

Taken together, the two papers say something less dramatic than either camp wants. Small investors as a group were sensible in a crash, which is when professionals are tempted to run, and were suggestible in a boom, which is when professionals are also tempted to run. That is a description of people, not of a generation. Anyone who has watched a bank manager chase a hot fund will recognise it.

Is the answer, then, to keep novices away from the exciting parts of the market? The case is respectable. Mr Tenev himself was asked at the hearing about gamification and replied, “We don’t consider that gamification. We know that investing is serious.”^{1PBS NewsHourWatch live: Robinhood CEO Tenev testifies at House Financial Services GameStop hearing18 Feb 2021} A serious product for serious people may nonetheless include a screen that shows what everyone else is buying. The attention evidence suggests the design counts for something, and design is something a regulator can examine without banning anyone from anything.

That points to a modest agenda. Regulators should ask what the app puts in front of the user, and whether a screen of what everyone else is buying is information or an invitation. That is a question about design, and the attention evidence suggests it matters more than the age on the account.

There is also a fair rejoinder: the sample ends before the pain. Both papers rest on data from 2020 or earlier, and neither can say how the January buyers will fare when the prices fall. Fair. But that argues for waiting for the data, not for deciding in advance that the young are fools.

The young traders have been told, loudly and often, that they are a problem. They might be more usefully treated as a customer base. It is the broker, and not the buyer, that has the apology to make.