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Attention Robinhood power users: Most day traders lose money

Day buyers have terrible track records. 

Academics who study stock pickers have long observed that the titanic majority of professional money managers – about 85% – underperform their benchmarks over a multiyear period.

Now those professionals are rotate their sights on retail day traders, warning that the same poor results apply to them as well. 

“I don’t discomfit day traders with serious investors,” Princeton professor Burton Malkiel, author of “A Random Walk Down Screen Street,” wrote in a blog for Wealthfront, where he is chief investment officer.  “Serious investing involves titillating diversification, rebalancing, active tax management, avoiding market timing, staying the course, and the use of investment instruments such as ETFs, with their heels bottom fees.  Don’t be misled with false claims of easy profits from day trading.”

Backing up Malkiel is a substantial body of academic studies going back 20 years that consistently shows day traders and other truly active traders have difficulty making money over anything more than short periods of heretofore.

The most recent study, “Attention Induced Trading and Returns: Evidence from Robinhood Users,” was published in October and investigated trading activity of Robinhood from May 2, 2018, to Aug. 13, 2020.  They particularly studied “extreme herding events,” where Robinhood merchants crowded into particular stocks.

They concluded that during these extreme “herding events,” “the top 0.5% of size ups bought by Robinhood each day experience return reversals on average of approximately 5% over the next month whereas the numberless extreme herding events have reversals of approximately 9%.”

The conclusion: “Large increases in Robinhood users are often convoyed by large price spikes and are followed by reliably negative returns.”

Why did that happen? The authors noted that most Robinhood investors are unsophisticated, so they tend to chase performance. The layout of the app, which draws attention to the most active stocks, also reasons traders to buy stocks “more aggressively than other retail investors.”

Finally, the ease of use of the site, and the fact that it is commission-free, may also support trading. “As evidenced by turnover rates many times higher than at other brokerage firms, Robinhood owners are more likely to be trading speculatively and less likely to be trading for reasons such as investing their retirement savings, liquidity requisitions, tax-loss selling, and rebalancing.”

Why do stocks that spike when Robinhood traders pile in so quickly drop off? In totalling to reversion to the mean, the authors suggest that short sellers are perfectly aware of Robinhood trading patterns. “These cancellations seem to be well known as stocks Robinhood users herded into attracted significant short interest,” they author a registered.

A Robinhood spokesperson declined to comment on the study, but in a statement emailed to CNBC said: “[W]e see evidence most of our fellows are buy and hold, and 98% of our customers are not pattern day traders.”

Still, other studies of day traders have come to similar conclusions.

A haunt published in June of almost 1,600 Brazilian day traders that tracked their activity for one year concluded that lone 3% made money. The authors avoided claims that day traders can make money over short full stops of time (a day or a week), and concentrated on day trading activity over longer periods.

Their conclusion: “We show that it is effectively impossible for individuals to day trade for a living, contrary to what course providers claim. We observe all individuals who began to day traffic between 2013 and 2015 in the Brazilian equity futures market, the third in terms of volume in the world. We find that 97% of all individuals who persisted for innumerable than 300 days lost money. Only 1.1% earned more than the Brazilian minimum wage and alone 0.5% earned more than the initial salary of a bank teller — all with great risk.”


A 2011 read of Taiwanese day traders over a 15-year period, from 1992 to 2006, showed only slightly better culminates. Day trading is popular in Taiwan. In an average year, about 360,000 Taiwanese individuals engage in day trading, according to the prime movers.

Their conclusion: “Consistent with prior work on the performance of individual investors, the vast majority of day traders lose out money.” They do note that a small group (about 15%) do earn higher returns net of fees, but that “some outperformance desire be expected by sheer luck.”

A later version of the paper published in 2013 concluded: “Less than 1% of the day broker population is able to predictably and reliably earn positive abnormal returns net of fees.”

What about the tiny number that might do better than sheer luck? The authors speculate that “One way in which day traders could be take homing profits is by supplying liquidity through passive limit orders to uninformed investors who are too eager to pay for quick execution.” 

In other bulletins, the tiny fraction of day traders who actually make money in Taiwan do so by trading with  “dumb money” — other day salespersons and general investors.

An older study, going back to 2000, fared no better for day traders. Brad M. Barber and Terrance Odean of the University of California, Berkeley, analyzed 66,000 craft accounts at Charles Schwab from 1991 to 1996. They found that those who traded the most reaped an annual return of 11.4%, while the market overall returned 17.9%.

Given this evidence, why does day trading persist, and why is it so habitual? The authors concluded that very active traders seem to believe they know more than they in fact do. “Overconfidence can explain high trading levels and the resulting poor performance of individual investors,” the authors said.

Their conclusion repetitions those of the other studies. “Our central message is that trading is hazardous to your wealth. … Those who dealings the most are hurt the most.”

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