The company’s initial public offering priced at $38 a share. On the low end of the expected range, that values the firm at $32 billion, and suggests demand may have been softer than anticipated.
- RELATED COVERAGE: CNBC follows Robinhood’s debut
But the action isn’t over yet. Investors and IPO experts are closely watching Robinhood’s first day of trading on the Nasdaq.
Much of the interest is due to an unusual feature of Robinhood’s IPO. The company set aside up to 35% of shares for individual investors on its platform — a huge chunk of stock that could fuel initial volatility.
“As I recall, there has not been a company doing what Robinhood is planning to do at the magnitude they’re planning to do it,” said R.A. Farrokhnia, a professor at Columbia Business School and executive director of the Columbia Fintech Initiative. He added that if the process doesn’t go smoothly, Robinhood would be in “uncharted regulatory territory” at a time when the company is already under the microscope.
Big picture: Robinhood’s stated mission is democratizing financial markets. In line with that message, it’s tried to make its IPO more accessible to retail investors and not just the financial elite, in part by offering a sizable portion of shares to customers at the IPO price.
Typically, up to 85% of IPO shares will go to institutional investors like hedge funds and money managers, according to Reena Aggarwal, a professor of finance at Georgetown University. The remainder are allocated to individual investors — but banks often distribute them among high-net-worth clients.
“IPOs haven’t been allocated to retail investors in a big way,” she said.
That leaves these investors out of luck when new stocks experience a typical “pop” on the first day of trading, soaring above the offer price.
That’s not a problem this time around, at least if you use Robinhood. But the scale of the company’s retail allocation is creating lots of uncertainty.
If the stock makes big moves in early trading [it did, falling 10% before recovering, according to CNBC], some customers may opt to sell their shares, generating turbulence.
Like other brokerages, Robinhood’s IPO access program has a policy to discourage what’s known as “flipping,” the practice of reselling shares shortly after an IPO to net a quick profit. Robinhood customers who sell shares within 30 days of an IPO may be barred from participating in IPOs for 60 days.
Yet Aggarwal still expects some flipping to take place.
“If the stock jumps up a huge amount, there’s going to be retail investors who say, ‘I want to cash out,'” she said.
Robinhood will build up goodwill with customers and drum up publicity for its IPO product if the effort runs smoothly, according to Farrokhnia. But if there are technical glitches or other problems, the company could find itself in trouble.
“Robinhood already has been in the hot seat,” he said. “Can they afford this?”
Earlier this week, Robinhood disclosed that regulators are investigating the fact that CEO Vlad Tenev is not licensed with FINRA, Wall Street’s powerful self-regulator. They’re also probing whether Robinhood employees traded shares of GameStop, AMC and other meme stocks before the app instituted restrictions during January’s frenzy.
Last month, FINRA slapped Robinhood with its biggest-ever penalty, accusing the company of giving investors “false or misleading information.” One issue the agency cited was Robinhood’s options trading procedures, which were at the heart of a recently-settled lawsuit filed by the family of a 20-year-old Robinhood trader who died by suicide last year.
Such regulatory headaches are reason to think Robinhood shares could be choppy in the long run, as well as in the near term, Aggarwal said.
