Stock brokerage firm Robinhood, which became an investor favourite by providing a free trading platform, has filed documents to the Securities and Exchange Commission (SEC) to go public. The company’s Initial Public Offering (IPO) is one of the most anticipated IPOs among investors.
Founded on April 18, 2013, and headquartered in Menlo Park, California, Robinhood is set to list its shares on the tech-heavy Nasdaq stock exchange under the ticker HOOD. In its filing, the company did not indicate a target valuation or date for its IPO, but it hopes to raise $100 million on its stock exchange debut.
Customers also have an advantage.
Robinhood revealed in its filing that its customers, the individual traders on its platform, will have access to 35% of its Class A shares at the IPO in a move intended by the company to give its customers access to its stock. This will be a much more significant portion of shares for retail investors compared to typical IPOs.
According to a report of statistics and data provided by Robinhood, the company has over 18 million users on its platform whose portfolio is more than $80 billion, all of which the brokerage firm manages. More than half of the users on the Robinhood platform are running first-time brokerage accounts.
The company said that its business is rapidly growing, and the indicator of this is the fact that it turned a profit of $7.5 million in 2020 after growing its sales to $958.8 million. This growth represents a 245% increase in the company’s sales as compared to 2019. 2019 was an awful financial year for Robinhood as the company suffered a loss of $106.6 million.
This year, there is scepticism among analysts on how Robinhood will perform and whether it will be able to post positive earnings. This is because, in the last quarter, the company took a write-down of $1.5 billion on warrant liabilities and convertible notes.
As it is required by SEC, Robinhood listed several risk factors in its filing. These included the increasing scrutiny by regulators and technology hurdles the company has faced in the past and is still facing.
Most of these came after the Alexander Kearns incident- a 20-year-old trader who committed suicide when he mistakenly thought he had lost nearly $750,000 in a risky bet on Robinhood. A system-wide meltdown of the Robinhood platform that happened early this year during the meme stock frenzy has also fetched the company measurable scrutiny, with investors questioning its reliability.
Enter regulators! On Wednesday, June 30, 2021, the Financial Industrial Regulatory Authority (FINRA), a regulator focused on WallStreet ordered Robinhood to pay about $70 million in fines to thousands of customers over accusations of hurting investors on its platform by giving them false or misleading information that could cause them trading losses.
FINRA also said millions of customers were affected by Robinhood’s systems outages that happened in March 2020, something that is not expected of a brokerage firm that bases all its operations online. The authority also accused the company of allowing thousands of customers to trade options even when it was not appropriate for them to do so.
“This action sends a clear message – all FINRA member firms, regardless of their size or business model, must comply with the rules that govern the brokerage industry, rules which are designed to protect investors and the integrity of our markets. Compliance with these rules is not optional and cannot be sacrificed for the sake of innovation or a willingness to ‘break things and fix them later,” said Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement. This is the highest fine ever imposed on a company by FINRA.
Highlighting FINRA’s directions, Robinhood said in its filing that it spent $3.6 million in compensation to customers for some sales they missed during the company’s system outages in March.
As mentioned earlier, young trader Alexander Kearns took his life last year after seeing a negative balance in his account on Robinhood, mistakenly believing that he was $75,000 in debt. His death led to the intense scrutiny of Robinhood’s options-trading feature. Although options trading can bring great returns if done correctly, it is also precarious, especially for novice investors.
Kearn’s family sued Robinhood for allegedly causing “wrongful death, negligent infliction of emotional distress and unfair business practices”, and in its filing yesterday, the company said that an out-of-court settlement had been reached with the family.
Last but definitely not least, we cannot end this without mentioning its activities in January during the GameStop saga. It should be remembered that Robinhood was at the centre of the Reddit-fueled trading that led to the surging of prices of meme stocks like videogame vendor GameStop (ticker: GME) and theatre operator AMC Entertainment (ticker: AMC), among others.
The volume traded in the stocks mentioned above on Thursday, January 28, 2021, was too high that the brokerage firm, Robinhood, was forced to suspend trading, citing clearing firm costs.
Three weeks later, Robinhood CEO Vlad Tenev and Reddit CEO Steve Huffman testified before the Financial Services Committee from the US House of Representatives about their decision to suspend trading GameStop and other meme stocks on January 28.
During his testimony, Tenev admitted that Robinhood made some mistakes during the meme stock trading frenzy, saying that the company did not have the liquidity needed to meet an early-morning demand from its clearinghouse for $3 billion on January 28, 2021.
How does Robinhood make money?
At the beginning of this article, I mentioned that Robinhood is commission-free. This basically means that you can sign up on the Robinhood app and start trading stocks, EFTs, and other assets free of charge. While appearing before the Financial Services Committee in February, Robinhood CEO Vlad Tenev told the committee that Robinhood is a “for-profit business and needs to generate some revenue to pay for the costs of running this business”, so then it begs the question: How does it make money?
Just because Robinhood doesn’t charge customers for trading on its platform doesn’t mean it doesn’t make money. The company generates more than half of its revenue through a practice called payment for order ﬂow. With this, Robinhood passes the order to a high-frequency market maker, who then pays a fee to the company for the order.