Robinhood’s stated mission is to “democratise finance for all” by making trading largely commission-free. Now the popular US online stock trading app plans to give retail investors the opportunity to buy shares in initial public offerings before trading starts.
It is a bold move, but a tricky one.
For investment banks, whose job it is to parcel out allocations, there is little incentive to pass shares Robinhood’s way. Their job is to ensure stable early trading, not something for which the trading app is known for engendering, and to prioritise their own clients. On the retail side, where allocations are in any case small, that means those wealthy enough to have a private banking account, not just a trading app on their phone.
Robinhood’s gateway to the pre-trading grey market, IPO Access, aims to level the playing field. Still, users should approach it with a healthy dose of scepticism. Similar apps are available elsewhere. Online lender Social Finance, for example, said in March it would give clients with more than $3,000 in their accounts the ability to invest in IPOs that it underwrites.
By contrast, Robinhood says it will work with Wall Street investment banks to secure allocations for retail investors. But this is an untested model. The banks may palm Robinhood off with riskier IPOs, betting on its younger and tech-conscious customers to take the bait.
Robinhood says 98 per cent of its users are not pattern day traders. Issuers, it says, are keen to participate because they want to reach out to a new generation of investors. It noted that demand for Figs, the medical scrubs company that is planning to offer up to 1 per cent of its upcoming IPO shares to Robinhood customers, has far exceeded Robinhood’s own expectations.
Either way, do not expect this to be a big money-spinner for Robinhood, which is gearing up for its own public listing. Sticking up for the little guy makes for a great sound bite. But its bread and butter will remain stock trading and payment for order flows.
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