Robinhood stumbles in Wall Street debut
The fast-growing trading company finished Thursday at $34.82, down 8% from its initial public offering price. Robinhood failed to score the first-day pop that new companies covet.
Only about a quarter of US IPOs have dropped during their first day of trading, excluding blank-check companies, according to Professor Jay Ritter from the University of Florida. The average first-day pop is 33%.
The deal is a major milestone for a company that pioneered zero-commission trading and is enjoying explosive growth.
“It’s humbling,” Robinhood CEO Vlad Tenev told CNN’s Julia Chatterley on Thursday. Tenev, an immigrant from Bulgaria, pointed to how he first arrived in New York City as a five-year-old in the early ’90s and began his entrepreneurial career in New York as well.
“Now to be back here after six years since Robinhood’s launch, it’s really surreal,” Tenev said.
The IPO is raising $2.1 billion and Robinhood began trading on the Nasdaq Thursday under the ticker symbol “HOOD.”
“The business has been a juggernaut. They’ve got a great platform they can build off of,” said David Weild, former vice chairman of the Nasdaq who is now the CEO of investment bank Weild & Co.
‘It seems rich’
Investors are paying a premium for Robinhood’s growth.
Now Robinhood is disrupting the IPO process. The company is allowing its users to buy a chunk — as much as one-third — of its IPO shares before they begin trading on the Nasdaq. Normally, only corporate insiders and powerful institutions can get access to these coveted shares.
New regulatory probes revealed
Asked by CNN if he’s tempted to take the FINRA exam just to “shut everybody up,” Tenev said Robinhood doesn’t think that’s “required at this point.” When asked if he’d do it when Square CEO Jack Dorsey gets registered with FINRA, Tenev said: “Maybe.”
Robinhood neither admitted to nor denied the FINRA charges.
‘Feed fish to sharks’
Rep. Sean Casten, a Democrat who represents the Illinois town where the Kearns family is from, is concerned about the gamification of trading platforms like Robinhood. In an interview, Casten said Robinhood has a huge economic incentive to lure as much “dumb money” as possible and then sell it to “smart money.”
“Its business model exists to feed fish to sharks,” said Casten, who introduced a bill this week that would require the Government Accountability Office to study the impact of the gamification of online trading platforms.
Asked if Robinhood is mature enough to be a public company, Tenev pointed to improvements made in leadership, customer support, infrastructure and technology.
“You can see how much the company has grown,” he told CNN.
Weild, the former Nasdaq executive, said Robinhood’s struggles may have only enhanced public awareness about the company — something that, ironically, could help the company. He likened the situation to challenges that faced America Online during its rapid expansion in the 1990s.
“All it did was increase their visibility and branding,” Weild said.
‘These are not free apps’
But Robinhood’s struggles have also shined a bright light on the company’s controversial business model, known as payment for order flow. Like some other online brokerages, Robinhood makes most of its revenue by selling its retail order flow to high-speed trading firms like Citadel Securities.
Robinhood argues that this tactic benefits everyday investors because it has paved the way for no-commission trading. But others say it’s really the high-speed trading firms that are benefiting — otherwise they wouldn’t be paying Robinhood for the order flow.
“These are not free apps. They are just zero-commission apps. The cost is inside the order execution,” Gensler told lawmakers.
If the SEC bans payment for order flow, it would deal a blow to Robinhood and force the company to find new sources of revenue.
Levered to the market boom
Smith, the Renaissance Capital executive, said another risk is how closely linked Robinhood’s bottom line is to the fate of booming markets.
“What if we get a negative market? People could easily get turned off if they lose money,” Smith said. “This company is so levered to equity and crypto markets. A downturn would hurt Robinhood more than a Charles Schwab.”