Robinhood May Sell Shares To Its Own Clients In Upcoming IPO

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by Tyler Durden
Thursday, Jan 07, 2021 - 04:32 PM

As this financial bubble - which according to most rational market participants and, recently, Jeremy Grantham, is the biggest ever - gets bigger by the day, we are observing things which are more and more absurd by the day and make the GFC's CDO-squared monstrocities seem like amateur hour for Madoff wannabees.

Case in point - the latest news out of that venue that has unlocked the full insanity of the stock market to 13-year-olds, Robinhood, which ahead of its upcoming IPO, which will value the company around $20 billion (it was valued $11.7BN in a September funding round), is planning on selling shares to its own clients!

Having been clearly inspired by the relentless bullishness of its own millennial and Gen-Z clients, which at last count were just over 13 million, Bloomberg reports that the Menlo Park-based company is weighing allocating a significant minority of the shares it will list to clients. It's unclear if Robinhood would also sell the details of how many shares it allotted to any given client to the highest bidding HFT firm.

Needless to say, this is a striking development as typically retail investors don’t get to buy into new listings at the offering price as those shares are saved for preferred institutional clients of a given underwriter. Instead, retail typically has to invest on the first day of trading in a rush that can drive up the stock price but can also lead to massive losses. Last November, unprecedented demand for new technology listings sent DoorDash and Airbnb soaring when they debuted last month, raising questions about whether the market has become overheated, and sparking a modest Nasdaq correction.

There is, of course, a reason why retail investors aren't usually invited to participate as anchor investors in major IPOs - besides merely kickbacks to major institutions who usually end up acquiring shares well below market prices - and that is that whereas institutions tend to be long-term holders, retail investors have a nasty habit of puking their holdings as soon as the shares dips aggressively. Enough retail sellers and the IPO could quickly turn into a disaster. Robinhood's management and board know this, yet the fact that they are willing to gamble with allocating a sizable chunk of shares to their own teenage clients shows just how much confidence they have that nothing can possibly spoil the market party or - in the immortal words of Chuck Prince - bring the dancing to an abrupt halt.

As a reminder, Bloomberg reported in late 2020 than Robinhood plans to go public as soon as this quarter, after trading volumes on its platform exploded during the coronavirus pandemic and when its clients outperform hedge funds 14-to-1. The company, which focuses on equities, also offers crypto, gold and options trading.

As Bloomberg notes, Robinhood's growth has come with controversy, including a hacking spree that compromised almost 2,000 accounts and flood of complaints to U.S. protection agencies depicting inexperienced investors losing money. In December, Robinhood paid $65 million to settle SEC allegations that it sold its retail orderflow to frontrunning HFT firms such as Citadel. Which, incidentally, is the core business model of the "free" brokerage that is Robinhood which makes its money not through commissions but from selling orderflow to market making firms which can frontrun it and millions in risk-free dollars each and every day, resulting in a new $100 million house for the likes of Ken Griffin every month.