Robinhood and the merry mob
The trading platform that brought retail investing to the masses goes public via retail investors
It would be hard for a firm that describes itself as “democratising investing” to go public in any other way. When Robinhood lists on the Nasdaq on July 29th, after The Economist goes to press, institutional investors will, as is usual, be able to buy and trade shares on the exchange. Less conventionally, the broker also plans to sell a third of the shares in itself to its users.
Your correspondent felt a frisson of excitement as she took part in an initial public offering (ipo) for the first time, bidding for a single share in Robinhood. The slick graphics explained how ipo shares are allocated, and reassured punters that—as is not the case at other brokers—order size, assets and the age of the account would play no part in whether a bid was accepted or not. Before most firms go public they do a roadshow, which typically involves investment bankers compiling snazzy slideshows, donning their sharpest suits and fanning out to meeting rooms in big cities to canvass support from pension funds, asset managers and other institutional investors. Robinhood instead made its 40minute pitch online to anyone who wanted to listen, on the Saturday afternoon ahead of its debut.
The antiestablishment approach is all too fitting. No other company’s fortunes have been as tied to the craze for meme stocks, fuelled by online forums and lockdowninduced spare time. Robinhood, which will go public at a valuation of $32bn, has seen its user base explode during the pandemic (see chart 1). Its prospects are likely to be determined by wherever the retail mania, the subject of much regulatory handwringing, goes next.
For decades retail investors were overlooked and underserved. The rich might have dabbled in trading stocks directly, but most workers earned defined-benefit pensions, which kicked any portfoliomanagement decisions regarding their biggest pot of savings to pension funds. The transition to selfdirected 401k retirement plans, registered investment advisers and retail brokers was at first accompanied by wide trading spreads and meaty fees.
Then the adoption of new technologies—such as computerised trading and wickedfast marketmaking algorithms— helped erode spreads. In 2013 Baiju Bhatt and Vlad Tenev, Robinhood’s founders and former employees of marketmakers, saw that it might be possible for a retail broker to make money by offering consumers commissionfree stock trading. It could instead earn revenues through “payment for order flow”. This is the practice by which a highfrequency marketmaker pays a broker a cut of the spread it earns from trading in exchange for the broker directing its customers’ trades to the marketmaker.
For a time the big retail brokers ignored the plucky upstart and continued to charge commissions and fees. But by 2019 the writing was on the wall. A quick, brutal