Robin Hood hoping for a smooth getaway after pricing its shares at the bottom end of the expected range

Robinhood Markets Inc, the company behind the app beloved of “meme stock” traders, raised less than anticipated in its stock market flotation yesterday. The initial public offering (IPO) was priced at US$38 a share, which was at the lower end of the expected range, valuing the company at about US$32bn. Had the issue been priced at the top of the range (US$42), the company would have achieved a market valuation of US$35bn but the valuation is still impressive given the company's most recent private funding round gave the company an implied valuation of US$12bn. READ Robinhood aims for the bullseye in blockbuster IPO Some 55mln shares were offered in the IPO, with founders Vlad Tenev and Baiju Bhatt and its chief financial officer selling 2.63mln of these; following the IPO, Tenev holds around 26% of the voting shares and Bhatt 39%. The company raised US$2.1bn in fresh capital via the flotation. Trading in the shares should commence on the NASDAQ exchange today with the ticker symbol of HOOD. By pricing the shares at the lower end of the expected range the company could be hoping to avoid an embarrassing debut that could see it become a meme stock itself. “It’s … a big day for Robinhood as it gets set for its first day of trading as a public company, when the US markets open later this afternoon, in what is expected to be one of the biggest IPO’s this year, after Coinbase’s direct listing. It’s a particularly challenging time for IPOs with sentiment as it is now and given how, after a lot of hype, Coinbase is now trading below its $250 indicative price after a big surge on day one,” observed CMC’s Michael Hewson. The Robin Hood platform, which allows retail investors to trade stocks, crypto and options without paying a commission, boomed in popularity earlier this year as the explosion in crypto markets and the buying frenzy around stocks such as GameStop Corp and AMC Entertainment Holdings Inc sent users flooding onto the platform, with its user base adding 6mln accounts in the first two months of 2021 alone. However, while Robinhood has seen its business grow rapidly and secure the backing of multiple institutional investors, some analysts are warning that the group still faces challenges that may put some investors off backing the group when it debuts on public markets. Susan Street of Hargreaves Lansdown, ostensibly a competitor to Robin Hood, said the app has come under fire for the so-called ‘gamification’ of investing with the use of rewards and celebratory notifications to encourage users to trade more. “Its strategy is paying off with the number of accounts increasing to 18 million by March this year from 7.2 million in March 2020,” Streeter said. “The way that Robinhood makes money has also come under intense scrutiny. Instead of charging investors a dealing commission, it puts clients' trades through certain companies, and in return, these companies pay Robinhood a fee. It’s these charges, called ‘payment for order flow’ that make the company most of its money. “Even though each fee is a tiny fraction of a cent per share traded, it soon adds up. Over the last year, Robinhood made $720mln from payment for order flow – three-quarters of its total revenue. That rose to 81% of revenues in the first three months of this year. “But this model is now under review, with the US regulator, the Securities and Exchange Commission (SEC) planning to look again at the stock market trading rules, which could include payment for order flow. “The concern is that it stops investors from getting the best price for their deals and could create a possible conflict of interest between firms like Robinhood and their clients. Firms promise to trade at, or at better than, current market price but the question remains about whether, under the system, there are even better prices available with other market-making companies, which they don’t use. If rules do change this could be a big worry for the firm’s revenues and future investors in the company. It was enough for Robinhood to highlight a potential ban on payment for order flow as a key risk in its prospectus,” Streeter said. Robinhood’s IPO roadshow answered questions I wasn’t asking https://t.co/YrZqmBdoNd pic.twitter.com/nlP1oC71WB — The Verge (@verge) July 24, 2021