As it made its premier public appearance on the NASDAQ on 29th July, it was in retrospect foolhardy to expect anything other than a rollercoaster of a debut for Robinhood and its army of retail traders. As the dust settles on that chaotic opening two weeks, questions remain about the app’s long-term strategy.
The commission-free trading app has proven a divisive figure; its proponents advocate the business’s contribution toward the democratisation of finance and investment, with a median user age of 31 compared to 37 for those with Hargreaves Lansdown – the preeminent investment manager. Others view it as the party primarily responsible for the boom of retail traders – a collection of short-squeeze traders that met in the chatrooms of reddit in early 2021 with a plan to inflate the value of underperforming companies, most notably GameStop and AMC Cinemas (pictured). The corresponding volatility of these drives singled out the key players for scrutiny.
Robinhood’s role in this explosion earned their CEO Vladimir Tenev a date with Congress, where he had to justify Robinhood’s decision to stop trading after their cash reserves were breached. They have also racked up more than one hundred million dollars in fines, primarily from misleading customers; moves which temporarily provoked the ire of their millennial customer base. Nevertheless, the website powered through the height of the short-squeeze, and remains the go-to for retail investors fighting against the grain.
In early trading, Robinhood failed to deliver on their hype. Debuting with shares worth $1.8 billion, the trading platform saw its opening share price of $38 per share tumble by 12% on its first day, before recovering some lost ground to finish at $36. Herd mentality, it seems, is a two-way street; there were surely a flurry of traditional investors keen for revenge.
Loyalty (and more than a smack of self-preservation), however, is strong currency in the retail trading business, one which revels in surging against the expectation of traditional investors. Robinhood’s decision to put aside 20% – 35% of its shares for its customers was rewarded with a bounce within a week of its muted debut. Shares rose by 24 percent as Redditors set their sights on a $60 share price, with the company’s market capitalisation peaking at $71 billion. A seal of approval from Cathie Wood of Ark Invest further contributed to the rise, bringing in sceptical traditional investors from the cold.
Chart: Robinhood NASDAQ Share Price
Though ultimately short-lived, the bounce preceded levelling out at an above-expectations $54 per share, for a market cap of $45 billion. Its settling at this higher level is likely a result of support from Ms. Wood and inflowing investors, signalling a marriage between disruptive retail traders and the more traditional hedge funds. It is marriages like these that will need to become increasingly common as median ages of investors continue to fall, and risk accordingly becomes more endemic in the market.
Where Robinhood goes from here is uncertain. The company was just one of a few ingredients that contributed to the short-squeeze of early 2021, along with speculation on Social Media and hungry, populist-inspired, new-age investors. None of these appear likely to abate in the near future – particularly without regulation that would be anathema to both the libertarian, stock market loving right, or the equality aspiring left, who finally have a reason to cheer speculation-driven disruption.
For now, Robinhood has settled into the market with relatively little upheaval, given the whirlwind of H1 2021 that preceded its entry into the NASDAQ. As investors continue to trend younger, expect disruption of this like to be commonplace, with retail investors ready to back or cripple businesses based on principles beyond finance. Robinhood’s titular motive has been to democratise finance, and bring the wealth of the traditional investor to the average punter. If Robinhood itself continues to form part of the equation for doing so, expect more sustained stability to be a long way off.