Will Robinhood’s IPO be GameStopped?

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Investors waiting for the chance to buy shares from Robinhood, the online trading app that has helped democratize equity investing by eliminating transaction fees, may have seen the recent GameStop drama with apprehension.

Many traders blame Robinhood for the video game retailer’s stock collapse after it climbed 1,700% in a matter of days to lose 90% of its value over the next week. The fact that online brokerage prohibited or restricted the purchase of GameStop and other so-called memes stocks served to fuel suspicion that he was working closely with hedge funds that were losing billions of dollars on their short positions.

Robinhood was hoping to go public this year through an IPO or other direct listing (she hired Goldman Sachs For this purpose). Has the trading app damaged its reputation enough that a public offering was not well received?

Image source: Robinhood.

A volatile mixture

Robinhood has offered a very plausible explanation for its actions that has nothing to do with the bailout of short sellers.

When an investor buys or sells a stock, the transaction takes some time to settle. While it seems virtually instantaneous in your brokerage account, the T + 2 requirement, as it’s called, means the actual trade doesn’t settle for two days (it was even longer in the past). Since the separate Robinhood Securities division of the trading app must make deposits with clearing houses to cover trades, the extreme activity massive short-squeeze trading forced Robinhood to limit the purchase of certain stocks until it could raise enough capital.

Robinhood says it was just a handful of stocks that generated virtually all of the trading volume – a situation CEO Vlad Tenev described as an unprecedented event.

With such a massive focus in just a few stocks, Robinhood had to find ways to mitigate the risk. While clearinghouses originally sought billions of dollars in deposits, the result was the imposition of trade restrictions and the deposit of around $ 700 million.

Collaborate to Protect the Rich

But putting the rumor toothpaste back in the tube is no easy task. Market maker Citadel Securities is Robinhood’s biggest client, generating around $ 12.4 million in market orders in December alone, while hedge fund Citadel helped rescue hedge fund colleague Melvin Capital of falling under the weight of his short GameStop bet. As a result, many remain convinced that the trading app has come under pressure to block trades in order to give hedge funds time to hedge their short positions.

While there are regulatory walls erected between the hedge fund and its securities business (and between Robinhood’s trading platform and its securities side), many still believe these barriers were easily climbed when billions of dollars were at stake.

For an app named Robinhood which launched with the statement “Let them trade!” It was a bit ironic that his actions saved billionaire hedge fund operators from ruin while slamming the door on the profitability of small retail investors.

There is no greener grass

Many traders abandoned the application after limiting the purchase of GameStop shares. According to an analyst, some 40% of Robinhood traders who left the app went to SquareCash App, while Fidelity, Stash and TD Ameritrade have also seen an influx of new customers.

On the surface, this suggests potential issues with a possible IPO. Robinhood has suffered a few other issues over the past year that have caused uproar among users, but quelling this notorious investor uprising with what looked like an iron glove could be the most damaging.

Still, Robinhood shouldn’t really worry. Even though some investors fled, many said they would come back. As PT Barnum would have said, there is no such thing as bad publicity. Even at the height of the controversy, the app was downloaded 600,000 times in a single day, suggesting that the hubbub simply gave Robinhood millions of dollars in free publicity.

App data outlet Apptopia says Robinhood remains the world’s most popular trading app by downloads, far surpassing the # 2 Webull app.

Short-term memory loss

Traders are already move on to their next stock targets. Marijuana growers love Tilray and Aurora Cannabis just skyrocketed by 50% and 21%, respectively, in one day, which one portfolio manager said was caused by “the army and friends of Reddit.”

It is not known whether they used Robinhood to drive up the stock, but the popularity of the trading app remains largely intact and its IPO will undoubtedly always be a success.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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