Herding off the Cliff at Robinhood?

Does technology amplify adverse herding among inexperienced investors? In their October 2020 paper entitled “Attention Induced Trading and Returns: Evidence from Robinhood Users”, Brad Barber, Xing Huang, Terrance Odean and Christopher Schwarz test the relationship between episodes of intense stock buying by retail (Robinhood) investors and future returns. Their source for buying intensity is the stock popularity feature of Robintrack from May 2, 2018 until discontinuation August 13, 2020 (with 11 dates missing and two hours missing for 16 other dates), during which the number of Robinhood user-stock positions grows from about 5 million to over 42 million. They define intense stock buying (herding event) as a dramatic daily increase in number of Robinhood users owning a particular stock in two ways:

1. Among stocks with at least 100 owners at the start of the day, select those in the top 0.5% of ratio of owners at the end of the day to owners at the beginning of the day.
2. Select stocks with at least 1,000 new owners and at least a 50% increase in owners during the day.

Using Robintrack data supporting these definitions and associated daily stock returns, open and close prices, closing bid-ask spreads and market capitalizations, they find that: (more…)