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Robinhood gets chilly reception from investors

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Investors gave Robinhood the cold shoulder on Thursday (July 29), as the stock trading app‘s shares closed down 8.4% on their first day of trading, having earlier fell as much as 12%.

The California-based online brokerage that brought commission-free trading to millions of Americans, hit public markets with its stock listed on the tech-heavy Nasdaq exchange under the ticker HOOD. The stock opened at $38, matching the IPO price, but closed at $34.82, making Robinhood “a broken deal” according to Barron’s. At $34.82, the company has a market cap of $29.1 billion, below the $35 billion valuation it was seeking with the IPO.

Founded in 2013, by  Stanford University roommates Vladimir Tenev and Baiju Bhatt, the Silicon Valley startup has recorded explosive growth. Robinhood , synonymous with the rise of meme stocks and retail investing, estimates having 22.5 million funded accounts as of the second quarter, up an eye-popping 151% from the same period last year. Its second-quarter revenue stood at $546 million to $574 million, up from $244 million in the year-ago period, according to its IPO prospectus.

Robinhood Share Price Performance
(Source: Nasdaq)

The company took an atypical step in reserving between 20% and 35% of its shares for its own customers. Normally, shares of a company going public are available only to institutions and not to individual investors before they start trading on exchanges.

“It’s certainly going to be one of the largest retail allocations ever,” Tenev, Robinhood’s CEO, said in an interview with CNBC on Thursday. “When you hear the mission of Robinhood, to democratize finance for all, it’s really about giving access to everyone that was once reserved for the 1 percent or the very wealthy.”

The Financial Times citing a person briefed on the matter wrote that Robinhood customers ended up at the low end of their planned 20% to 35% allotment.

Robinhood IPO
(Image via Twitter)

The stock market debut comes amid regulatory challenges. The company has been subject of significant scrutiny, including concerns that it has “gamified” trading and for its use of a business model: payment for order flow which refers to the practice of routing customers’ trades to big firms like Citadel Securities and Virtu that execute the transactions and profit from the bid-ask spread. It’s how a lot of trading apps offer “free” trading, though the trading isn’t really free.

Last month, the Financial Industry Regulatory Authority (FINRA), Wall Street’s powerful self-regulator, slapped Robinhood with a $70 million fine, the biggest-ever fine in the authority’s history. FINRA accused Robinhood of harming millions of customers and giving investors “false or misleading information.”

In Massachusetts, Secretary of State is William Galvin is suing Robinhood to have the app banned in the state. “They deliberately go out to entice their customers and rely upon their lack of experience to entice them into buying things that they might not understand,”  he told NPR in an interview.

On Tuesday, Robinhood said in a filing that FINRA was investigating  its founders’ compliance with registration requirements. Tenev and Bhatt are not registered with the regulatory agency.

Has Robinhood democratized financial markets or launched a generation of inexperienced investors who have become addicted to the promise of “get rich fast”? It also remains to be seen is whether Robinhood will be one of the meme trades it has profited off of.