Robinhood aims to spark a financial revolution and its IPO is just the beginning

Robinhood’s payment for order flow is a common practice in the investment world, but it has been criticized for its lack of transparency. (Image: Reuters)

by Dimitro Spilka

In the midst of the battle to contain small squeezes, lawsuits, vitriol and investments in Robinhood’s timely IPO, we are witnessing the beginning of what has become a financial class war between retail and Wall Street.

Read also: How to invest in Apple, Amazon, Google, other US stocks from India: All you need to know

Robinhood has fans, too many enemies, and even more users. Across 2021, the investing app has rarely strayed from the limelight as it played a starring role in the Gamestop short Squeeze, itself accused of being a ‘casino’ by Wall Street legend Warren Buffett and confronted heavy fine To cause “significant loss” to investors.

It is perhaps characteristic of the chaos that Robinhood appears to be accustomed to not soon after the company was handed a $70 million fine by the US Financial Industry Regulatory Authority that it IPO announced, in which the company is expected to achieve a valuation of $35 billion.

For most companies, a $70 billion fine and widespread criticism among the industry’s elite would be enough to derail an IPO indefinitely — but Robinhood isn’t like most companies.

The app showed no greater outrage than its own users, when it suspended business of GameStop and other popular stocks in January, prompting class-action lawsuits against the company. But despite the outcry, Exposure brought more than 20 million monthly active users to the app in February.

In an investment landscape that is growing at an alarming pace post the COVID-19 pandemic, Robinhood has positioned itself as the essential app for retail investors.

Stock volumes have exploded over the past year. Average daily trading volume in 2020 reached 10.9 billion, which is significantly higher than the 7 billion recorded in 2019. Early 2021 saw even more momentum. 14.7 billion recorded at the beginning of the year. As the chart above confirms, a significant portion of these new arrivals in the retail world have turned to Robinhood to buy and sell stocks.

Wall Street’s rejection of Robinhood

In January, as retail investors coordinated themselves on social media to use Robinhood to take advantage of a small squeeze on GameStop shares, the investment app came to the end of a backlash among some of the biggest names on Wall Street. I found myself

Warren Buffett has been particularly skeptical about Robinhood’s operating model and how he will achieve its controversial pay for order flow system in its IPO. “What worries me is how they handle the source of income when they say they don’t charge the customer anything,” Buffett said of retail investment app. “It will be interesting to see how they describe it.” During this, Charlie MungerWarren Buffett’s right-hand man called Robinhood “a gambling parlor as a respectable business”.

Robinhood’s payment for order flow is a common practice in the investment world, but it has been criticized for its lack of transparency. Pay for order flow works when market makers like Citadel Securities or Virtu pay online brokers like Robinhood Execute your client trades. The broker is then paid a small fee for the shares routed, which can reach millions if trading activity has increased in recent months.

Both Munger and Buffett’s concerns revolve around Robinhood’s conflict of interest, which requires investors to trade to make money through its business model — allowing app users to hold their stocks for the long term. can discourage.

While there are some legitimate concerns over the transparency issues behind the payments to order flow model, Robinhood and its supporters at retail believe the retaliation of its critics against the app is the result of their own conflicts of interest.

fighting back against elitism

Robinhood responded to criticisms of Buffett and Munger with his own scathing takedowns of the Wall Street giants.

“A whole new generation of investors were criticized in one fell swoop, and this comment ignores the cultural change taking place in our country today,” a Robinhood spokesperson said. Jacqueline Ortiz-Ramsay in a statement. “Robinhood was created to allow people who do not have access to generational wealth or the resources that come with it to start investing in the US stock market. Suggesting that new investors have a ‘racetrack speculators mentality’ is disappointing. And it’s noble.”

Successfully welcoming small-scale investors to the investment world, Robinhood has created a service that facilitates the needs and requirements of users in a way that its traditional counterparts and Wall Street can never do.

recently launched IPO AccessRobinhood’s dedicated initial public offering platform enables IPO access for first time retail investors without the need for a minimum account balance – meaning anyone can participate in and invest in the company before it goes public. .

As Robinhood facilitated a low squeeze on GameStop shares in January, small-scale investors rejoiced at getting an over on Wall Street’s hedge fund. The New Yorker shared an online post on the Reddit group r/wallstreetbets titled ‘This is for you, dad’ in which One user spoke “Hedge funders literally drink champagne as they watch down Occupy Wall Street protesters” as their father’s “concrete company almost collapsed overnight.”

With this in mind, Robinhood is deliberately aiming to recruit retail investors, who grew up in the wake of the 2008 Wall Street crash, who have identified the industry’s elite as enemies and want to beat them at their own game. Huh. For them, like Robinhood, pay for order flow disputes pale in insignificance As long as it paves the way for an equal playing field and investment egalitarianism.

success of Robinhood’s IPO The innovative trading app will make for the perfect gauge for sentiment. If the initial public offering is successful and the platform archives its $35 billion valuation, that would be a good indicator that the app is building a good footing in Wall Street exploration, while a failure to launch could indicate that Financial hegemony is ‘ not yet ready to be removed.

Robinhood may be aiming to go public, but its ambitions go far beyond just getting on Wall Street. People’s investment platform intends to spark a financial revolution from the inside out, and its IPO is just the beginning.

(Dimitro Spilka is a technology and finance writer based in London. He is the founder of Solvid and Predicto. The views expressed are those of the author.)