Depending on whom you ask, the stock trading app Robinhood has either democratized Wall Street trading or launched a generation of unsavvy investors who have become addicted to the promise of quick cash.
The tension looms as Robinhood is set to make its debut on the Nasdaq on Thursday under the symbol HOOD, raising the profile of a company that has become a household name during the pandemic – while also attracting intense regulatory scrutiny.
On Wednesday, Robinhood told its users that it is pricing its initial public offering (IPO) at $38 a share, at the low end of its estimated range. The share price would value Robinhood at around $32 billion.
Robinhood, a Silicon Valley startup that has 22.5 million users with accounts linked to their bank accounts, is allocating more than a third of its shares to its users during its IPO, an unusually high amount that the company says speaks to its mission to empower the average investor.
Yet some users are on the fence about whether to buy any of its stock, even among Robinhood diehards.
Article continues after sponsor message
“I honestly haven’t decided quite yet,” says 20-year-old Jacob Frueh in San Diego who uses Robinhood daily and helps runs a Discord server dedicated to investing advice.
Frueh said he has doubts that Robinhood’s explosive popularity during the pandemic is something the company can sustain.
“I think that the retail investor boom has relatively passed,” Frueh said. “So they may not see as much growth in the future.”
PLANET MONEY Robinhood’s Very Bad Day Others point to how Robinhood’s zero-commission trades are only possible because of a controversial arrangement known as “payment for order flow.” By the company’s own admission, 81% of its revenue is derived this way.
The setup offers a kickback to Robinhood when it sends a person’s stock order made on the app to a Wall Street firm like Citadel Securities to complete. The agreement has drawn critical attention from regulators.
Securities and Exchange Commission Chairman Gary Gensler has said this setup raises conflict of interest questions. If regulators moved against it, experts said Robinhood’s entire business model could be crippled.
It already reached a $65 million settlement over misleading customers about this practice in December, although Robinhood may not be out of the woods yet.
Millions Turn To Stock Trading During Pandemic, But Some See Trouble For The Young THE CORONAVIRUS CRISIS Millions Turn To Stock Trading During Pandemic, But Some See Trouble For The Young “I think those conflicts of interest are real and should be scrutinized,” says Sinan Aral, director of MIT’s Initiative on the Digital Economy. “And Robinhood should be worried about that, since it is such a significant fraction of their revenue.”
Robinhood CEO Vlad Tenev told Bloomberg worries about Robinhood buckling under regulatory pressure are “baseless,” saying that “people don’t understand the details” of the controversial arrangement. Tenev said the deal Robinhood has struck with large institutions benefits Robinhood customers.
But in its paperwork filed with the SEC ahead of its public offering, Robinhood said regulating or banning “payment for order flow” would have a “have an outsize impact” on the core of its business.
On Tuesday, Robinhood disclosed that the Financial Industry Regulatory Authority was probing the company over why Tenev and Robinhood’s other co-founder, Baiju Bhatt, were not registered with the regulatory agency.