Robinhood IPO: why believers failed to achieve “moon landing”


Robinhood’s business is based on helping millions of American investors “push stocks to the moon,” a phrase used by those seeking to push up the stock prices of popular “memetic stocks.” But as the U.S. brokerage sold its shares to the public for the first time on Thursday, Favor is not rewarded Many people ignore the call to buy, some even Enjoy the decline in its share price.

In just a few years Robin Hood Reinvigorated the last intraday trading that occurred in the Internet boom and the subsequent depression more than two decades ago.Investors on its app have sent shares and cryptocurrencies such as Tesla, such as Dogecoin Set a record high, and bring the discussion about financial markets back to the dining table across the United States.

Its propaganda to investors has become a marketing folklore: everyone should have the opportunity to enter the U.S. stock market, not just Wealthy institution On Wall Street.For a while this year, the populist argument was almost established because newly established online traders helped send GameStop shares Uniting is detrimental to Famous hedge fund. Its user base has expanded to 31 million and now has 22.5 million fund accounts.

But its rise has Perilous And scandal. It suffered a power outage. The customer is locked out of the account and almost unable to get support.It has been heavily fined and the regulator has Intensify investigation Understand how it makes money and whether it Game-like features It has crossed the line. Robinhood CEO Vlad Tenev was forced to attend the US Congress earlier this year.

Robin Hood Stock market debut Designed to open a new chapter for brokers. On the contrary, the company’s stock price fell 8.4% from the $32 billion market value set a few hours ago, which was one of the worst starts in the history of its large-scale IPO. It also emphasized how much work it needs to do to convince the investment community that its business can withstand increasing pressure from regulators and that once the pandemic is over, the American public will continue to trade.

Robinhood’s announcement of plans to sell up to 35% of its shares to ordinary investors caused shock. © Spencer Platt/Getty Images

“The entire business model may be affected by regulatory crackdowns,” said Reena Aggarwal, a professor at Georgetown University in Washington. “The IPO performance is of no avail. People feel that “I am not the only one who doubts.” The entire market has doubts about the company’s future.”

For many people, the Robinhood brand has represented an entire generation Young and active investor They have flooded the market since the pandemic began. The company’s rise began in 2013, when it launched a free app that allowed users to share stock forecasts. Two years later, it developed an application that allowed commission-free transactions, which attracted a waiting list of 800,000 people before its launch.

Co-founders Tenev and Baiju Bhatt and their early investors bet that stock trading will become a wedge in the wallets of millions of new consumers.

Chad Byers’ company Susa Ventures first invested in Robinhood in 2013. He said that compared with other fintech startups, the company has benefited from “unfair customer acquisition costs” due to the hype surrounding low-cost transactions. “This is the most viral part of fintech,” Byers said.

“The Robinhood brand represents the next generation of consumers,” Tenev said in an interview with CNBC on the morning of the float. “Over time, we hope to become the most trusted and culturally relevant investment application in the world.”

Robinhood CEO Vlad Tenev was forced to attend the U.S. Congress earlier this year
Robinhood CEO Vlad Tenev was forced to attend the U.S. Congress earlier this year © Daniel Acker/Bloomberg

Brokers can easily find cultural relevance. Its easy-to-use app has a dopamine-inducing function, which attracts customers and motivates them to use the app an average of seven times a day.

Its recent dramatic rise was accompanied by a once-in-a-lifetime moment that plunged the US market into chaos and locked most people at home. The government’s response to the pandemic has helped increase savings accounts, and with the cancellation of gambling and sporting events, millions of Americans have turned to Robinhood to try new things. When the market caught fire, they did so, reaching a dazzling new height.

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The zero account threshold and the ability to trade fractional shares help accelerate its growth and attract those who want to enter the market with small amounts of money. This growth has put pressure on mature brokers, and by the end of 2019, almost all major players have reduced their trading commissions.

Trust is a bigger challenge. According to the regulatory agency, the technical difficulties of its platform during high-volume trading days have cost customers tens of thousands of dollars.

Financial democratization

According to people familiar with the matter, several large institutional investors-usually critical to the success of any company’s IPO-participated in Thursday’s listing. According to an adviser to the company, some people cannot believe that Robinhood’s business will not face an “existential threat” due to possible regulatory reforms.

Others are skeptical of IPOs that plan to sell up to 35% of the 55 million shares to ordinary retail investors, which is very different from traditional listings where this figure usually hoveres around 10%.

The bar chart with the largest decline in the first day of IPO in the United States, raising at least US$2 billion (%) shows that Robinhood is one of the worst IPOs in history

A person familiar with the matter said that Robinhood had formulated a plan to provide customers with a partial IPO long before choosing a bank to lead the process. One consultant said that in the end, it sold 20% to 25% of its shares to customers through its own application. The broker described the move as another step towards the democratization of advanced financial operations.

But the bankers involved in this process worry that the issuance may be coldly received. As they struggled to measure demand in the past week, it became clear that they had difficulty enlisting the support of many large fund managers.

Private supporters of Robinhood are also nervous, because it is clear from the feedback of top fund managers that the company’s IPO will be coldly treated by the public market. The company eventually priced its stock at the bottom of the range it was selling to investors, and even dropped rapidly from that level in the first few minutes of the transaction. Lower its valuation Nearly US$3 billion to US$29 billion.

Robinhood's target valuation was as high as 35 billion U.S. dollars when it went public, but it soon fell to 29 billion U.S. dollars
Robinhood’s target valuation was as high as 35 billion U.S. dollars when it went public, but it soon fell to 29 billion U.S. dollars © Chris Delmas/AFP via Getty Images

The death of day traders

Robinhood’s business model relies heavily on revenue from customers selling buy and sell orders to high-speed market makers. This controversial practice is known as Order flow paymentThe so-called Pfof is under scrutiny for failing to provide investors with the most favorable price. The regulation of this practice is one of the many things listed in Robinhood’s more than 70 pages in the “Risk Factors” section Prospectus.

California Democrat Brad Sherman initiated a bill in Congress in July that would direct the Securities and Exchange Commission to study Pfof and make recommendations, including a possible ban on the practice. Committee chair Gary Gensler is an outspoken critic of Pfof.

Robinhood can easily trade stocks in a few seconds. But critics say this also lowers the threshold for obtaining high-risk trading products such as derivatives, leverage and cryptocurrencies, which are difficult to understand and may exacerbate investor losses.

Options trading is the largest portion of Robinhood’s revenue, contributing 38% of its business in the first quarter of 2021.Another 17% comes from cryptocurrency transactions, of which more than a third comes from Speculation attributed to Dogecoin, This was originally set up as a joke.

The histogram of quarterly revenue by contribution for the three months ending March 31, 2021 (%) shows Robinhood Bank’s

On the eve of the IPO, Tenev emphasized that Robinhood is a “safety first” company, trying to counter the criticism that the brokerage company encourages novice traders — half of its clients are first-time traders — to participate in these higher-risk products while offering Inadequate customer support. But experts say that these numbers will not add up.

“The traditional wisdom of customer service is that 1,000 or 2,000 customers are one-to-one [customer service representative],” said Thomas Peterffy, CEO of Interactive Brokers, a trading platform. “Robinhood has 22 million customers. .. But there are only 2,000 employees in total. How do they do customer service? ”

The lack of customer support peaked in June 2020, when Robinhood customer Alex Carnes He committed suicide after erroneously thinking that he had suffered a loss of $730,165 in margin trading. In fact, his account balance is $16,000. Karnes sent the brokerage company’s customer service emails via email—without a phone number at the time—but only received an automatic response before his death.

People close to the company said that Robinhood realized that its problems were too late and could not avoid the tragedy. The former employee said that the death of Carnes was a turning point in the broker’s disruptive approach to the financial market, and it was eager to strengthen its legal and compliance team and lobbying activities in Washington.

Dogecoin, originally considered a joke, accounts for one-third of Robinhood's cryptocurrency trading revenue
Dogecoin was initially considered a joke, accounting for one-third of Robinhood’s cryptocurrency trading revenue © Gabby Jones/Bloomberg

“Robinhood said that they are first a technology company, but if you are managing people’s wealth, you better think of yourself as more than just a technology company,” said Democratic Congressman Sean Carsten, who is a powerful House of Representatives. Member of the Financial Services Commission.

Legislators stated that when apps are designed to incentivize trading behavior and expose vulnerable customers to the cutting edge of the market, providing access is not enough.

“If we just say that market participation is a good thing in itself, then we will have a negative impact, just like what happened to the Karns family,” Carsten said. “Why do we encourage people to do day trading?”

In May, Finra imposed a levy on it The highest fine ever Prosecuted the brokerage company for US$70 million on charges of causing “extensive and significant harm” to investors. Robinhood’s business model and practices have also aroused the anger of the US Securities and Exchange Commission and the regulatory agencies of Massachusetts, New York and California.

SEC Chairman Gary Gensler bluntly criticizes order flow payment or Pfof
SEC Chairman Gary Gensler bluntly criticizes order flow payments or Pfof © Jose Luis Magana/Reuters

It is not clear how the brokerage company will continue its rapid growth as it attempts to transform from a disruptor into part of the financial industry. Robinhood’s revenue depends on transaction volume, which hit a record high during the pandemic, but is expected to decline as the pandemic restrictions relax.

Experts say Robinhood’s great success It also relies on something it cannot control: the bull market.

“When everything is on the rise, it is easy to make positive statements about financial democratization,” said Patrick Krizan, a senior economist at Allianz. “When we democratize the economic downturn, it will be more interesting to see how people behave.”


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