Robinhood's debut fails, dropping 8% below opening price, high retail ownership a concern?

On the first day of trading, the well-known brokerage platform Robinhood saw a disappointing debut. With an expected price range of $38 to $42 per share, the valuation was estimated to be between $32 billion to $35 billion. Although it briefly dropped by 11% to the IPO price of $38, it closed at $34.82, a significant drop of 8.4%.

The listing of Robinhood is one of the focal points in the traditional financial markets and is also a highly anticipated IPO within the cryptocurrency community. However, falling below the IPO price indicates that the market is no longer as exuberant as it was in the first half of the year, and investors seem to lack confidence in this brokerage platform that has experienced a tumultuous year.

Non-Traditional IPO

Robinhood's listing price on the stock market is set between $38 and $42 per share. In a unique move to demonstrate its original mission of lowering the barrier for the public to enter the financial market, the company has reserved 20% to 35% of its shares to be distributed through a lottery system to users on its platform.

Usually, these shares are only allocated to Wall Street institutional investors or high-net-worth individuals. CEO Vlad Tenev expects this to be the largest retail allocation in history.

While institutional investors include giants like Goldman Sachs, JPMorgan, Barclays, and Citigroup, Greg Martin, Managing Director of brokerage firm Rainmaker Securities, believes:

Retail traders are definitely more volatile, and the higher the retail ownership, the more susceptible the stock price is to events like the Gamestop short squeeze.

Furthermore, unlike the traditional IPO lock-up period of six months, Robinhood employees can sell 15% of their shares immediately after the company goes public, and investors can sell 15% after three months.

Platform Concerns

According to the prospectus submitted to the SEC, Robinhood is facing around 50 lawsuits related to meme stocks, including allegations of operating without registration and insider trading by employees. Both the U.S. financial regulators FINRA and SEC are currently investigating.

One of the most notable issues is Robinhood's payment for order flow business. Unlike popular IPO companies like Uber and DoorDash that continue to operate at a loss, Robinhood has already turned a profit through this business model.

However, the payment for order flow practice has been controversial, drawing scrutiny from the SEC and criticism from legendary investor Charles T. Munger, who called it "a dirty way to make money."

This payment for order flow business accounts for over 80% of Robinhood's first-quarter revenue. CFO Jason Warnick explained:

We believe that payment for order flow is a better deal for our customers compared to the old commission structure. It allows for trading smaller amounts without worrying about commission costs. In any case, we are willing to engage in any regulatory discussions, and if changes are needed, Robinhood can adapt.