What do you get when you combine attractive apps, extra free time, and no trading commissions? A boom in retail, of course.
Citadel Securities estimates that around 25% of stock transactions this year are tied to retail investors, up from around 10% in 2019. Most transactions occur in Robinhood accounts.
Robinhood recently made headlines when it stopped openly sharing its users’ trading data, but now management is rethinking that decision. “We’re thinking about it,” Robinhood co-founder Vladimir Tenev said in an interview with Bloomberg.
If Robinhood’s goal is to put the best interests of its customers first, the smarter choice is to keep their data private. Maintaining data confidentiality protects retail investors from hedge funds as well as their own heat-hunting tendencies.
How the Smart Money Crowd Uses Robinhood Data
We live in a time when people are just starting to realize how valuable their data is. To learn more about it, readers should watch Netflix’s new movie, The social dilemma.
Robintrack.net is an independent website that uses Robinhood data to monitor the number of its clients holding particular stocks over time. The site produced charts and tables illustrating the relationship between price momentum and popularity, as shown below.
Robinhood clients have used these “dashboards” to generate trading ideas, as have some hedge funds. One of those hedge funds is said to be Point72, managed by Wall Street legend Steve Cohen.
When the Robinhood data stream turned dark, Business intern reported that Point72 immediately began calling other trading platforms and investment apps, looking for similar data the company could use to generate “new trading signals.”
Robintrack.net owner said Business intern he had seen evidence that Point72 and the quant DE Shaw hedge fund were trying to retrieve the site’s data. The report also states that Cohen’s fund was not the only one calling for other platforms.
My first thought while reading this story was, “This is not a fair fight.”
Steve Cohen is one of the smartest and most competitive traders on the planet. It is rumored that he was part of the inspiration for Bobby Axelrod’s character from the hit Showtime show, Billion.
Like Axelrod’s character in the series, Cohen employs a legion of other smart traders, armed with the most advanced trading technology. In short, Point72 and DE Shaw are not the kind of businesses that everyone should want to run behind their business data. These are funds that literally eat up complacent capital for breakfast, lunch and dinner. They exist to maximize returns for their stakeholders.
If Robinhood is to be seen as a trusted brokerage partner rather than a hangout for at-risk heat hunters, it should focus its efforts on helping its stakeholders achieve a similar goal. It starts with protecting the private information of its users.
How the retail crowd uses Robinhood data
In 1906 a man by the name of Sir Francis Galton visited a cattle fair. There, the statistician and cousin of Charles Darwin asked about 800 people to guess the weight of an ox. The average estimate of 1197 pounds missed actual beef weight by only 0.01%. It was surprising to Galton, but not by chance.
in the Wisdom of crowdsJames Surowiecki uses stories like this to illustrate the principle of group thinking, showing how large, diverse groups tend to be better problem solvers, forecasters, and decision makers than individuals or a few elites.
Surowiecki writes: “If you can bring together a diverse group of people with varying degrees of knowledge and insight, you had better hand over major decisions to them rather than leaving them in the hands of one or two people, no matter how smart they are. they. people are.”
Another classic example from the book is the “jelly-beans-in-a-jar” experience. This test, originally designed by finance professor Jack Treynor, has been replicated by many, as shown in the following video demonstration.
If a “wise crowd” is characterized by independent actors, popularity scorecards that promote breeding are obviously a bad idea.
Here’s how a section of Robintrack’s website explains the usefulness of its information:
One of the most useful things you can do with the data provided by this site is to understand how people react to market movements. Depending on whether people buy the plunge, get on board during a push-up because they think it will go up, or take a profit, this data allows you to observe each of these different situations and plan your own trading accordingly.
Blindly, “buying dips” and “getting on board during a push-up” are not good investment strategies. These are tactics employed by speculators, which would explain the above-average risk profile of Robinhood’s most popular stocks.
Ryan Downie from The motley madman points out that the most held stocks among Robinhood users have mostly lagged the market since April, and “even in the cases that have produced favorable returns, more nuanced analysis shows investors may have taken too much volatility to justify these gains. ”
By inspiring a new generation of investors to take a more active interest in the stock market, Robinhood has achieved something admirable. This can allow people to take a more active role in managing their financial affairs. However, this will all backfire if it results in losses and loss of confidence in the financial markets.
Today’s market is dominated by a confluence of momentum factors. Rather than reposting data that further encourages momentum research, a healthier approach would be for Robinhood to broaden the depth of its investor education efforts – more like Schwab and Fidelity have done.
Start educating people more about evaluation and price momentum. This way, retail investors can see the markets through a more complete spectrum, more similar to the smart money crowd, which would help level the playing field. Even old school newspapers post statistics. momentum – like the high and low of a stock over 52 weeks – alongside valuation metrics, like a P / E ratio.
The smarter and more empowered retail investors are, the stronger and more efficient capital markets will become. And it ultimately benefits everyone.