Robinhood to Roll Out IPO Purchase Feature

Need to Know

• Robinhood, the commission-free trading app, is building a platform that will “democratize” initial public offerings (IPOs).
• The fintech’s IPO platform would allow users of its app to purchase shares alongside Wall Street funds.
• If successful, the ability to allow users to buy directly into IPOs would further lessen Wall Street’s ability to influence stock market flotations.

Analysis

Robinhood is developing a platform that will allow its users to buy into initial public offerings, marking another move by the investment app to democratize investment opportunities that are traditionally reserved for Wall Street firms.

According to a report in Reuters, Robinhood plans to carve out a chunk of its IPO shares for its users and to use technology it is building to administer this offering via a new platform. The technology could then be used to offer its users the ability to purchase shares in other companies’ IPOs — provided the platform is approved by US regulators and provided Robinhood is able to negotiate agreements with companies and their brokerages to offer IPO shares to users of the app.

Currently, Robinhood users and other individual traders cannot buy into the stock of a newly listed company until its shares start trading. And, as shares often trade higher when they debut, Wall Street funds that get their foot in the door during an IPO have an advantage. The move, therefore, could erode Wall Street’s influence on stock market flotations.

Robinhood announced it had confidentially filed paperwork with the U.S. Securities and Exchange Commission for its own IPO earlier this week. The company has yet to disclose details, experts anticipate the offering could value Robinhood at up to $50 billion.

The company came under fire recently for restrictions it placed on the trading of heavily shorted “meme stocks”, such as GameStop, following a Reddit-driven purchasing blitz of those shares earlier this year. The company’s new IPO platform could increase its popularity with users who felt the GameStop trading restrictions were at odds with Robinhood’s mandate of democratizing finance.

Robinhood, which launched in 2013, currently has more than 13 million users. In August 2020, the company published monthly trading data for the first time, reporting 4.3 million daily average revenue trades (DARTs) per day. At the time, the company also said it had surpassed all its major brokerage competitors in June. This included TD Ameritrade, which came in second with 3.84 million DARTs; Interactive Brokers, with 1.8 million DARTs; Charles Schwab, with 1.8 million DARTs; and E-Trade, with 1.1 million DARTs. The company’s core mandate is making stock trading more accessible, as evidenced by a 2019 product offering through the app that made it an option for users to purchase fractional shares at as little as one cent per share.