Robinhood, the trading platform everyone loves to hate, is going public on the Nasdaq soon. 

Although Robinhood hasn’t officially filed for the listing yet, its eventual debut is likely to be one of the biggest of the year. According to CNBC, it’s unclear whether Robinhood will choose a direct listing or a traditional IPO. The company is expected to file an S-1 with the SEC in the coming weeks, meaning it would likely go public one to two months later. 

The company’s valuation has grown to $40 billion after the price for its shares in the secondary market soared, according to data from Rainmaker Securities. (Note that these shares are much more illiquid than those traded in public markets, so the  eventual IPO price could be quite a bit different than this figure.) Robinhood has also considered selling some IPO shares directly to users, which usually doesn’t happen — retail investors typically don’t get the offering price, but rather have to invest on the first day of trading, which drives up share price. 

The company, along with CEO Vlad Tenev, has consistently been in hot water ever since the GameStop fiasco, when Robinhood halted trading of the meme stock. It’s had more than its fair share of controversy before, too.

“This is what I signed up for,” Tenev said in a recent interview with Bloomberg Television. “Any time you’re causing change in society and kind of upending the status quo, it’s probably not going to be the most comfortable process.”

Here’s how Robinhood became the biggest trading app on the market, how it makes money, and why it’s so reviled by — and essential to — retail investors.

A brief history of Robinhood

Robinhood was founded in 2013 by Vlad Tenev and Baiju Bhatt. The two founders used to be co-CEOs until Bhatt stepped down in November 2020, leaving Tenev to lead the company. Both Tenev and Bhatt had worked on building high frequency trading platforms for hedge funds, but realized that Wall Street made it difficult for amateur investors to get trading, while paying next to nothing to facilitate those trades. They envisioned a platform with no commission fees, and, as their site states, a way to “democratize finance for all.” At least that’s how it started.

Robinhood quickly gained traction after its 2015 launch, but the pandemic turned the company into a juggernaut. Quarantine left Americans with nothing to do, so many of them turned to trading stocks, even while the market was tanking. In the first four months of 2020, Robinhood amassed 3 million new users, which brought its then-total to 13 million. By August 2020, its valuation hit $11 billion, up 50% pre-pandemic.

After nearly a year of rapid growth, Robinhood became even more popular after the Reddit group r/wallstreetbets made “meme stonks” a thing by exploding the share price of companies like GameStop and AMC. It also catapulted Vlad Tenev into the public eye like never before as GameStop took Wall Street by storm.

According to our data, Robinhood’s app store ratings skyrocketed from 2.43 million on January 29 to 2.95 million by February 1. The number is currently at 3.26 million, a 46% increase from this time last quarter. According to Bloomberg, Robinhood continues to be the most downloaded trading app, followed by Webull and Fidelity. In January alone, the company amassed 3 million new users.

Robinhood’s rise to prominence wasn’t all fun and games — the company has been plagued with scandal after scandal, especially in recent months. But more on that later.

How does Robinhood work?

Robinhood’s trading platform isn’t very complex: users set up an account in minutes and begin trading without commission or trading fees. Robinhood’s lack of fees shook up traditional trading, prompting more established firms like E*Trade and TD Ameritrade to eliminate their own commission fees.

Robinhood makes money through “payments for order flow,” a business model that lies at the heart of virtually every trading platform. Incidentally, it was invented by none other than Bernie Madoff in the 1980s. Madoff may be no more, but some of his (legal) money-making strategies are still in use.

So how does it work? “Payments for order flow” involves small payments made to Robinhood from one of their financial services partners. Robinhood makes nearly half of its money from two firms, Two Sigma Securities and Citadel Securities. Every time a trader places an order, those firms pay Robinhood for the right to facilitate them. 

Robinhood only gets a few cents per order, but with over 13 million users, 17 cents per hundred shares for equity trades and 58 cents for options adds up. Options trading is the most lucrative — the company made $111 million of its $180 million second quarter revenue on options alone. Traditional rivals didn’t get quite as lucrative a deal with these financial services partners, leading to even more money flowing to Robinhood.

In addition to those fees, Robinhood makes money through its $5 per month premium service, Robinhood Gold. Paying users get access to a $1,000 margin for trading, bigger instant deposits, and market research reports.

Controversy and company future

Although Robinhood has been swarmed by critics following the GameStop fiasco, the company’s business model was under scrutiny from the very beginning. Critics say the app steers traders towards options trades, and the app itself “gamifies” trading through its sleek design and bright colors. Many have argued that Robinhood was never out to democratize finance — it was just out to make money.

One of Robinhood’s first issues came when the app crashed after being overloaded. In March 2020, as the stock market was tanking amid the pandemic, Robinhood’s app shut down three times in a single week. One lasted 17 hours, leaving traders with no option but to wait. And there have been plenty more outages before and since. According to DownDetector, a site that tracks outages, Robinhood has had outages at least once a month since July 2019, with the exceptions of August and December 2020.

Then came one of Robinhood’s biggest tragedies, involving 20-year old trader Alexander Kearns. After mistakenly thinking he had amassed $700,000 in losses in a single day, Kearns committed suicide in June 2020. Unfortunately, some of Kearns’s trades had not cleared yet, meaning that Kearns didn’t owe the total amount. Kearns’s family filed a wrongful-death lawsuit earlier this month, blaming the app display.

In January, Robinhood was under fire again, this time for its biggest PR blunder yet: halting trading of GameStop. As Redditors tried to drive up the price of meme stocks, in part to make sure hedge would lose money, Robinhood shut down. 

Naturally, investors were upset. Not only did many delete the app, but they argued that Robinhood had betrayed its users by doing exactly what a traditional financial institution would do: side with Wall Street. Still, Robinhood’s popularity only grew along with the GameStop buzz, and the company didn’t lose many users. Because of the difficulties of transferring funds over to new trading platforms, and because Robinhood’s interface is the easiest to use according to many retail investors, users stayed with the platform.

As the sole CEO, Tenev was tasked with damage control, making an appearance during a Senate hearing on the GameStop craze. He even chatted with Barstool Sports founder and day trading guru Dave Portnoy, a known ringleader of Robinhood’s legions of ex-fans. 

The biggest consequence from the incident came in late February, when Robinhood was hit with 49 lawsuits. Robinhood’s app display plays a role in many of those lawsuits, as users say it doesn’t list information about options trading and cash positions clearly. The company has received requests for information from the SEC, states attorneys general, financial regulators, and federal prosecutors over the trading restrictions it imposed on the meme stocks.

As Robinhood goes public, the company may see success as share prices soar, potentially putting the company back in public favor. Alternatively, the company may need to reckon with disappointing performance in the market, likely causing Tenev to do more damage control. However, as Tenev said, he did sign up for it.

About the Data:

Thinknum tracks companies using the information they post online, jobs, social and web traffic, product sales, and app ratings, and creates data sets that measure factors like hiring, revenue, and foot traffic. Data sets may not be fully comprehensive (they only account for what is available on the web), but they can be used to gauge performance factors like staffing and sales.

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