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Robinhood’s dismal performance on stock market debut

Robinhood

Shares in the company dropped 8.37% to US$34.82 after the IPO had raised nearly US$2 billion at US$38 apiece

Robinhood Markets Inc officially listed on the Nasdaq overnight. It was one of the most anticipated debuts of the year. This comes after a surge in the platform’s popularity after the stock market crash in 2020.

Public trading in the US-based commission-free trading app was bleak on the first day, with shares in the company dropping 8.37% to US$34.82 after the initial public offering (IPO) had raised nearly US$2 billion at US$38 apiece.

Robinhood has been shrouded in controversy since rising to prominence during the COVID-19 crash and ensuing short squeezes. As of the second quarter, the number of funded accounts on the platform has more than tripled from Q1 2020 to 22.5 million.

As account numbers soar, so has revenue for the company. According to its prospectus, Robinhood estimates second-quarter revenue of US$546 to US$574 million. Even at the lower end that would suggest a 124% rise.

Part of this revenue has been a point of controversy for the trading app company. As revealed in its prospectus, Robinhood generated US$331 million in revenue from payment for order flow (PFOF).

PFOF is the compensation a market maker gives to a broker when the broker sends the order to them. While this is not illegal, the Financial Industry Regulatory Authority (FINRA) fined the company US$1.25 million in December 2019 for failing to ensure its customers received the best price for orders.

Moreover, Robinhood was sued in a class-action lawsuit a year later for failing to disclose that PFOF made up a substantial part of its revenue.

Given these events, investors and customers have wondered whether the “investing for everyone” essence of Robinhood still holds.

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