Robinhood’s IPO is just the start of an investment class war
Amid the short presses, lawsuits, vitriol and the battle to invest in inclusiveness, Robinhood’s timely IPO, we see the start of what is on the verge of becoming a financial class war. between retail and Wall Street.
Robinhood has admirers, many enemies, and even more users. In 2021, the investment app has rarely strayed from the headlines as it played a leading role in the short squeeze of GameStop, found itself accused of being a “casino” by Wall’s loyalist Street Warren Buffet and faced huge fines for causing “material harm” to investors. .
Perhaps characteristic of the chaos Robinhood seems to be used to that barely has the company been fined US $ 70 million by the United States Financial Sector Regulatory Authority than it announced its IPO, in which the company hopes to achieve a $ 35 billion valuation.
For most companies, a $ 70 billion fine and widespread criticism among industry elites would be enough to derail an IPO indefinitely – but Robinhood isn’t like most companies.
The app did not spark more outrage than its own users when it suspended trading of GameStop and other popular actions in January, triggering class actions against the company. But despite the outrage, the exposure drew more than 20 million monthly active users to the app in February.
In an investment landscape that is developing at a breakneck pace following the Covid-19 pandemic, Robinhood has positioned itself as the go-to app for retail investors.
Inventory volumes have exploded over the past year. Average daily trading volumes reached 10.9 billion in 2020, up sharply from the 7 billion recorded in 2019. Early 2021 saw an even greater movement, with 14.7 billion recorded at the start of the year . As the chart above confirms, a significant portion of these newcomers to the retail world have turned to Robinhood to buy and sell stocks.
Wall Street’s rejection of Robinhood
In January, as retail investors coordinated on social media to use Robinhood to take advantage of a short squeeze on GameStop stocks, the investment app found itself at the mercy of a backlash among some. of the biggest names on Wall Street.
Warren Buffett has been particularly skeptical of Robinhood’s operating model and how they will approach their controversial order flow payment system in their IPO. “I worry about how they handle the revenue stream when they say they don’t charge the client anything,” Buffett said of the retail investing app. “It’ll just be interesting to see how they describe it.”
Robinhood’s payment for order flow is standard practice in the investment world, but it has been criticized for its lack of transparency. The business model has become more and more mainstream since commission-free trading began to take hold in the financial world.
Order Flow Payment works when market makers like Citadel Securities or Virtu pay online brokers like Robinhood to execute their clients’ trades. The broker then receives a small fee for the actions routed, which can run into the millions when trading activity picks up like in recent months.
Adding his voice to Wall Street’s dissatisfaction with the application, Charlie Munger, Warren Buffett’s right-hand man, called Robinhood a “gambling hall masquerading as a respectable business”.
Both Munger and Buffett’s concerns revolve heavily around Robinhood’s conflict of interest which forces investors to negotiate in order to make money through their business model, which can cause the app to discourage users from keeping their actions over long periods.
Until March, Robinhood was displaying a confetti animation to accompany users making their first transaction on the app, a feature that has led to accusations of “gamifying” the app’s investment.
While there are valid concerns about the transparency issues behind the checkout flow model for orders, Robinhood and its retail supporters believe its detractors’ vendetta against the app is the result of their own conflicts. of interest.
Fight against elitism
Robinhood countered the criticisms of Buffett and Munger with its own scathing withdrawal from the pillars of Wall Street.
“Suddenly a whole new generation of investors has been criticized and this comment overlooks the cultural change taking place in our country today,” Robinhood spokesperson Jacqueline Ortiz-Ramsay said in a statement. “Robinhood was created to enable people who do not have access to generational wealth or the resources that come with it to begin investing in the US stock market. It is disappointing and elitist to suggest that new investors have a “race track betting mindset”.
The table above shows that there is evidence to support Ortiz-Ramsay’s point of view. Robinhood’s average investor account size is much smaller than its more traditional counterparts, indicating that the app has become much more popular with smaller and more casual investors – many of whom will be new to investing after having experienced the closing mindset of stocks and stocks in the years leading up to commission-free investing apps.
By successfully welcoming smaller-scale investors to the investment world, Robinhood has created a service that has facilitated the wants and needs of users in a way that its traditional counterparts and Wall Street have never been able to.
The recent launch of IPO Access, the platform dedicated to the Robinhood IPO, allows, for the first time, access to the IPO for retail investors without the requirement of an account balance minimum, which means anyone can participate and invest in a company before it goes public.
While Robinhood facilitated the downsizing of GameStop shares in January, small investors rejoiced to have outperformed Wall Street hedge funds. The New Yorker shared an article online in the Reddit Group r / WallStreetBets titled “This Is for You, Dad” in which one user spoke of “hedge funders literally drinking champagne as they looked down on protesters in the city. ‘Occupy Wall Street’ as their ‘Father’s concrete business collapsed almost overnight.
With that in mind, Robinhood consciously aims to recruit the retail investors who grew up following the 2008 Wall Street crash who identified industry elites as the enemy and seek to beat them at their own game. For them, as with Robinhood, pay-as-you-go controversies are insignificant as long as they pave the way for a level playing field and investment egalitarianism.
The success of Robinhood’s IPO will be a perfect indicator of sentiment towards the innovative trading app. If the initial public offering is successful and the platform archives its $ 35 billion valuation, this will be a good indicator that the app is doing the right thing in its pursuit of Wall Street, while the failure of the launch could signal that financial hegemony is’. t ready to be removed just yet.
Maxim Manturov, head of investment research at Freedom Finance Europe, believes Robinhood has a strong case for a successful IPO. “As the company changes the entire industry, other big market players must adapt to the new conditions in order to stay on track and not lose their customers. Investors are drawn to both the promising new technologies and the competitive advantage that Robinhood currently has, ”said Manturov.
Robinhood may be aiming to go public in the next few days, but his ambitions extend far beyond his arrival on Wall Street. The popular investment platform intends to spark a financial revolution from within, and its IPO is just the start.