Robinhood debut debacle: Here’s what went wrong

Summary 

• Robinhood shares, on its first day at NASDAQ declined by 8.4% from the issue price of $38.
• Through an IPO, Robinhood managed to sell 52.4 million shares for nearly $2 billion.

On its first day at the stock exchange, shares of Robinhood (NASDAQ: HOOD), an online broker that recently gained popularity among the millennial population due to its commission-free trading, fell 8.4% from its issue price of $38. Robinhood went public after an 18-month record issuance period. At the close of day on Thursday, its share price was down by $3.18, at $34.82, lowering its market valuation to $29 billion.

According to Bloomberg, it featured at the top among the worst IPO debut of 51 US firms that raised as much cash as Robinhood or more. It replaced another brokerage firm MF Global Holdings Ltd., from the 2007 IPO, as the worst debutant among qualifying firms. MF Global ended its first day down by 8.2%. Earlier, Robinhood’s underwriters had hinted about being conservative of the pricing of its stocks and later indicated share price to be at the lower half of the $38 to $42 range.

By going public, Robinhood sold 52.4 million shares to raise nearly $2.1 billion. The company had set aside as much as 35% of the shares for traders through its app, who otherwise would have to wait until the stock's appearance on the exchange to purchase it. Vlad Tenev and Baiju Bhatt, the Co-founders, sold about $50 million each in stock through the IPO.

As of Q2 2021, the company holds around 22.5 million funded accounts, up by 151% from the same period last year, while its revenues reached $574 million, up from the previous year’s $244 million.

What went wrong?

Robinhood’s stock market debut comes at a time of regulatory scrutiny and controversies associated with the brokerage firm, including its role in the meme stock phenomenon.

Although the company has been around for over eight years, the brokerage app grew in popularity only during the pandemic, with investors using the platform to purchase shares of bankrupt companies like Hertz and bidding for AMC Entertainment and GameStop shares. Additionally, customers used the app for stock fee-free stock trading. The app generated revenue from the fee collected from the sales of its users' stock orders to other Wall Street companies, including Citadel Securities, majority owned by Ken Griffin, the founder of Citadel hedge fund.

This set-up received criticism from the regulators as online brokers such as Robinhood send customer orders to companies that pay the highest fees instead of those that complete orders at competitive prices.

Politicians such as Elizabeth Warren are calling for implementing new rules for companies such as Robinhood that make it mandatory for such firms to disclose details of how data on trades and customers is used. Gary Gensler, Chair of the Securities and Exchange Commission (SEC), lambasted the "gamification" of the stock trading process on apps and highlighted the resulting potential conflicts of interest for market makers who make a profit from high-volume trades. Thus, signalling the need for a new set of regulations for the likes of Citadel Securities, Robinhood, etc.

Fresh probes underway

Robinhood revealed fresh regulatory probes by the Financial Industry Regulatory Authority (FINRA) and SEC. FINRA is engaged in the investigation of "non-registration status" of the company CEOs. It has received inquiries from the SEC and FINRA about employee trades involving meme stocks such as GameStop, AMC, etc.

In January, Robinhood faced a backlash when it temporarily blocked users from purchasing high volume stocks of companies such as GameStop on its platform. The app managed to collect $110 million through the trade of publicly listed companies that were once meme stocks and generated market buzz through social media networks such as Reddit. The SEC fined Robinhood $65 million for failing to properly disclose details about how it makes money and not always getting clients the best execution prices for trades. Robinhood, however, did not officially admit to foul play. In June 2021, FINRA also fined Robinhood $70 million in its largest-ever for misleading customers and causing losses.

Robinhood maintains that it has been investing heavily to improve and ensure platform stability and develop knowledgeable customer support and legal and compliance teams to focus on customers and democratizing finance.