- Study finds commission-free trading in the US harms market quality
- While retail trades usually predict market returns, Robinhood’s don’t
- Market quality harmed by uninformed traders rather than high frequency traders
Stock trading commissions have been in steady decline for many years, making investment more accessible and helping to lift the proportion of retail investors in the US stock market from 10 per cent in 2010 to 20 per cent last year. But it is the arrival of zero trading commission platforms with no account minimums which has ushered in a new era of stock market participation, particularly in the US. Robinhood, the pioneer of commission-free trading, reported 3 million new accounts in the first quarter of 2020 alone, as lockdowns put many other activities on hold.
Studying this new breed of investor, academics Gregory Eaton and Brian Roseman, of Oklahoma State University, along with T. Clifton Green and Yanbin Wu of Emory University, undertook multiple regression analyses to see what impact Robinhood users are having on stock market quality in a paper titled Zero-commission individuals, high frequency traders and stock market quality.