The past few months stock markets have seen some unusual phenomena. Stocks at the brink of bankruptcy surged, relatively unknown stocks that have stock acronyms similar to those of large companies were rising. Pandemic buzzword stocks exploded. There is a force that is moving the stock market, it’s not the fed, it’s not the hedge funds. It’s an army of amateur traders using the zero-commission trading app Robinhood disrupting long-standing norms in capital markets.

1. Laurens Verelst & Renaud Joseph
INITIO Groupe Square
Robinhood, a force to
be reckoned with?

2. 1
Contents
Introduction ......................................................................................................... 2
What kind of stocks do Robinhood investors prefer? .................................................. 2
Buy the rumour.................................................................................................. 3
Acronym mix ups ............................................................................................... 3
Banking on bankruptcy ....................................................................................... 4
Are they beating the market?............................................................................... 4
Robinhood investors impact on stock market ............................................................ 5
Correlation between users and stock price ............................................................. 5
Correlation between popularity in the app and stock return ..................................... 6
Correlations: digging deeper ................................................................................ 6
Small caps vs large caps ..................................................................................... 8
What does this mean for the market ..................................................................... 8
Zero commission trading apps in Europe .................................................................. 9
Conclusion.......................................................................................................... 10
About the authors ............................................................................................... 11
Sources ............................................................................................................. 12
About Initio ........................................................................................................ 13
Contact ........................................................................................................... 13
Initio Belgium ............................................................................................... 13
Initio Luxembourg ......................................................................................... 13

3. 2
Introduction
The past few months stock markets have seen some unusual phenomena. Stocks at the
brink of bankruptcy surged, relatively unknown stocks that have stock acronyms similar
to those of large companies were rising. Pandemic buzzword stocks exploded. There is a
force that is moving the stock market, it’s not the fed, it’s not the hedge funds. It’s an
army of amateur traders using the zero-commission trading app Robinhood disrupting
long-standing norms in capital markets.
In early May the zero-commission trading app Robinhood reported 3 million new account
openings in the first quarter of 2020 as many Americans discovered the stock market for
the first time in their lives. They decided to invest their stimulus checks.
On top of that casinos were closed and all of the major sports leagues were cancelled
which led punters into trying their hand at the stock market (Silva, 2020).
The combined effects of all of these developments led to some wild market moves.
Robinhood user positions in S&P 500 stocks have soared to record highs over the last
couple of months.
Exhibit 1: Robinhood data show a leap in retail investor equity trading
Source:Investopedia
What kind of stocks do Robinhood investors prefer?
It seems Robinhood investors have a taste for risk. They have been repetitively seen
investing in stock that were hitting rock bottom or rushing to buy stocks based on some
news or rumour. It does look like those Robinhood investors, which for a large part are
new to the stock market, do not really take the time to do any research on the
companies they’re investing in and might be jumping in with both feet without much
thinking. This gave rise to a few interesting movements in the stock market that puzzled
many experienced investors and made the news. Here are few examples of some
surprising decisions made by Robinhood investors.

4. 3
Buy the rumour
Shares of Kodak jumped more than tenfold after a public announcement they had secured
a government loan to make generic pharmaceutical ingredients. Attracted by this
announcement and this new source of revenue for Kodak, the number of Robinhood
investors in this stock grew eightfold and appears to be the reason for this huge spike in
the share price (Winck, 2020).
The Robintrack application shows the number of Robinhood users holding a stock as well
as the price of that stock. For Kodak, we can see a clear correlation between the two lines
at the moment of the spike.
Exhibit 2: correlation between Robinhood users holding Kodak and Kodak’s stock
price
(Robintrack, 2020)
Acronym mix ups
Robinhood traders (among others?) made a small Chinese company grow ten fold as they
mixed the ticker of the company with the acronym FANG (refers to the stocks of four
prominent American technology companies: Facebook (F), Amazon (AMZN), Netflix
(NFLX), and Alphabet (GOOG)). As the shares of these FANG were rallying, a lot of traders
entered the market and bought the FANGDD ticker, believing it was related to these
companies. (Ponczek & Hajric)

5. 4
Banking on bankruptcy
Back in May, HERTZ filed for bankruptcy protection. While under the chapter 11
bankruptcy process a plan of reorganization is generally agreed upon with creditors, in
most scenarios, equity is completely lost. Usually equity plummets and is sold at a large
loss, but in the case of Hertz, there has been a huge increase in the number of
robinhood traders buying the shares after it filed for bankruptcy. This made trading
professionals puzzled since there is only a small chance for shareholders to regain
anything. This is a very risky gamble strategy, hoping that by buying shares of a
bankrupt company, others might join in and inflate the price. On the back of these new
investors buying shares, Hertz even attempted to raise money by selling new shares to
those robinhood and other retail investors although it is almost certain those shares will
be completely worthless (Smith, 2020).
Exhibit 3: Correlation between Hertz price and the Robinhood users holding
Hertz
(Robintrack, 2020)
Are they beating the market?
An interesting question to ask ourselves is if these Robinhood investors, that seem to be
involved in very risky and sometimes incomprehensible strategies are beating the market
and other professional investors?
A very captivating research paper has been published just a few days ago on this
subject. The research, called “RETAIL RAW: WISDOM OF THE ROBINHOOD CROWD AND
THE COVID CRISIS” (Welch, 2020), shows that although Robinhood investors have a
taste for risky and shady stocks, the majority of their holdings are in large and highly
liquid firms. Without entering in too much details, the article demonstrates that a
portfolio based on the collective holdings of Robinhood investors did not under-perform
the market and actually had a positive alpha (abnormal return) using different models
based on Fama and French (Fama & French, 2014).
Furthermore, a report from Goldman Sachs even showed that a basket of stocks favored
by retail investors on Robinhood had beaten hedge funds returns. It appears retail
investors timed the bottom of the COVID 19 crisis better than the hedge funds did and
outperformed hedge funds by 16% (Button, 2020).

6. 5
Robinhood investors impact on stock market
Seeing the number of retail investors that joined online platforms such as Robinhood and
their high trading activity on the stock market, we ask ourselves if these investors could
have an impact on the market.
Correlation between users and stock price
If we want to assess the impact of these Robinhood investors on the stock market we need
to take a look at the correlation between the one day change in number of Robinhood
users holding a stock and the one day price return of that stock. This way we can see
whether an increase in Robinhood users holding a stock was met with a similar increase
in that stock’s price (Maggiulli, 2020)
When we take a look at Ford it certainly does not appear to be the case. In fact with
most of the stocks there is little to no correlation between these two.

7. 6
Exhibit 5: Number of Robinhood users holding Ford stock (green) compared to
the price of the stock (pink)
Source:robintrack
Correlation between popularity in the app and stock return
When looking at the relationship between the popularity rank (the most traded stocks on
Robinhood) and the correlation between the one day change in number of Robinhood users
holding a stock and the one day price return of that stock, more than half of the selected
stocks show no correlation. This implies that for those stocks more popular stocks do not
have higher correlations than less popular stocks (Maggiulli, 2020).
Exhibit 6: Robinhood popularity rank vs correlation
Source: (Maggiulli, 2020)
Correlations: digging deeper
However when observing the plot above you will notice that some stocks do exhibit a
high correlation between the change in the number of Robinhood users holding the stock
and its one day price change. We have highlighted these stocks in the image below.

8. 7
Exhibit 7: Robinhood popularity rank vs correlation
Source: (Maggiulli, 2020)
To elaborate on this view. Researchers ranked these top 200 stocks from the one with the
lowest correlation to the one with the highest correlation and made some astounding
discoveries (Maggiulli, 2020).
Exhibit 8: Least to most correlated stocks based on Robinhood Activity
Source: (Maggiulli, 2020)

9. 8
Small caps vs large caps
There is a large discrepancy between small cap and large cap stocks. While large cap
stocks were mostly unaffected by the Robinhood effect since the volume that Robinhood
traders were bringing in was not enough to move the market.
Smaller speculative stocks like Moderna, Nikola, Hertz show a high correlation between
Robinhood users holding the stock and the stock’s price changes. Because it was easier
for Robinhood users to move the price since some of these stocks were thinly traded
(Moderna) and others were trending toward being worth 0 (Hertz). When we take a
closer look at Kodak for instance we can see the users holding in Robinhood dictates the
stock’s price perfectly
Exhibit 9: Number of Robinhood users holding Kodak stock (green) compared
to the price of the stock (pink)
Source: Robintrack
What does this mean for the market
Short sellers should be wary of the Robinhood effect. Their job is to try to correctly
identify companies in poor liquidity positions that could file for bankruptcy protection.
This has always proven to be successful for short-sellers. However, there’s reason to
believe that amateur traders might flock to the stock of such companies at dirt cheap
levels driven by a hope that the company could somehow overcome the troubles (Silva,
2020).
Robinhood traders do seem to have an influence on small cap stock, this needs to be
taken into account by professionals.

10. 9
Zero commission trading apps in Europe
While Robinhood has been quickly growing and attracted a userbase of 6 million users in
North America, there does not appear to be an equivalent effect occurring in Europe yet.
At first sight, the company’s success across the Atlantic is unprecedented and similar
offerings should be available in Europe. However, the fragmentation of European stock
exchanges, the lack of retail investing culture and the fact that more than 80 % of ETF
assets in Europe are in the hands of institutions makes it difficult for trading apps to gain
traction (Galouchko, 2020).
That’s not to say companies aren’t trying their hardest to become the Robinhood of
Europe. Revolut launched a commission free stock trading service for its metal
customers. Metal customers can make up to 100 commission free stock trades each
month. Another big upcoming player is Freetrade which does not charge any
commissions for orders that are executed until 4 PM. Our Dutch neighbours also
launched a trading app called Degiro. Degiro started its online brokerage services in the
Netherlands initially and then expanded to nearly 18 countries.
There are a lot of companies trying to offer services similar to those of Robinhood.
However, at this point in time, they lack the userbase to significantly affect the market
like Robinhood did for certain stocks during this pandemic.

11. 10
Conclusion
Robinhood and other no fee trading apps are attracting more and more investors. In the
future we might see an increase of retail investors that are non-financially literate
flooding the stock market. Strange stocks movements that puzzle investors such as
those highlighted here might become more and more frequent. If this is the case, there
will be a need for professionals to incorporate this new variable in their investment
decisions.
Quite surprisingly, some studies have actually shown that retail traders have actually
beaten the market and have as well outperformed some hedge funds by better timing
the market. It would appear that although Robinhood investors have made the news due
to some risky bets on volatile stocks and strategies, they do in fact have the majority of
their investment in large and liquid companies.
As we’ve discussed here, it would seem that retail investors using trading apps such as
Robinhood do have an impact only on small stocks at the moment. The volume of
transactions by those retail investors appears to still be too small to move large stocks,
leading to no particular correlation between those stock movements and the number of
Robinhood investors holding them. However, we should keep monitoring this correlation
in the future. If more retail investors are joining the market, their impact on large stock
might become significant.

12. 11
About the authors
Laurens Verelst joined Initio in 2018 after having worked as a financial management
consultant for two years. He is a CFA level III candidate who is passionate about
everything related to the investment management industry ranging from new trading &
investment strategies to technological advancements like robo-advisors. He has a soft
spot for fund and portfolio management and the academical and technological
advancements that could propel the industry forward.
Renaud Joseph joined Initio in 2020. He worked for more than 3 years at the Bank of
New York in the collateral management department. He is passionate about a multitude
of fields of finance such as asset management, risk management, microfinance and
enjoys learning about new technologies. Renaud is a CFA level II candidate.

13. 12
Sources
Button, A. (2020, June). Goldman Sachs: Millennial Traders on Robinhood Beat Hedge
Funds by 16%! Retrieved from https://ca.finance.yahoo.com/news/goldman-
sachs-millennial-traders-robinhood-
122045814.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLm
NvbS8&guce_referrer_sig=AQAAAEiE7A5ey_oaG5tiaLpFU08nfYVDQYEvAQ5TOPgZ
-spdNHQUzrE5J4ri5efX6h8o4l31_dfLYuErElOAQV
Fama, E. F., & French, K. R. (2014). A five-factor asset pricing model. Journal of
Financial Economics.
Galouchko, K. (2020, July 20). robinhood effect is starting to shake up a stuffy etf
market. Retrieved from https://www.bloomberg.com/news/articles:
https://www.bloomberg.com/news/articles/2020-07-20/robinhood-effect-is-
starting-to-shake-up-a-stuffy-etf-market
Maggiulli, N. (2020, August 17). No, robinhood traders aren't affecting the stock market.
Retrieved from https://marker.medium.com: https://marker.medium.com/no-
robinhood-traders-arent-affecting-the-stock-market-8758af5ad319
Ponczek, S., & Hajric, V. (n.d.). Robinhood market made bursting bubbles Wall Street's
obsession. Retrieved from https://www.bnnbloomberg.ca/robinhood-market-
made-bursting-bubbles-wall-street-s-obsession-1.1449914
Robintrack. (2020, 11). Retrieved from https://robintrack.net/
Silva, D. D. (2020, june 19). The Rise Of Robinhood Traders And Its Implications.
Retrieved from https://seekingalpha.com:
https://seekingalpha.com/article/4354679-rise-of-robinhood-traders-and-
implications
Smith, K. A. (2020, 6). Robinhood & Hertz: The Troubling Saga Of A Bankrupt Stock.
Retrieved from https://www.forbes.com/advisor/investing/robinhood-bankrupt-
hertz/
Welch, I. (2020). RETAIL RAW: WISDOM OF THE ROBINHOOD CROWD AND THE COVID
CRISIS. NATIONAL BUREAU OF ECONOMIC RESEARCH.
Winck, B. (2020, july 29). More than 63,000 Robinhood traders piled into Kodak shares
during its 2,100% rally. Retrieved from https://markets.businessinsider.com:
https://markets.businessinsider.com/news/stocks/kodak-stock-price-rally-leads-
robinhood-investors-buy-robintrack-retail-2020-7-1029447131

14. 13
About Initio
Initio is a business consultancy firm specialized in the Financial Industry. Every day, our
consultants contribute to the successful delivery of business projects by transferring
their expertise to our client's management and internal teams.
Initio operates in Brussels and Luxembourg and his part of the SQUARE GROUP, an
international strategy and management consulting firm.
Contact
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