The Big Story

Scumbag Steve goes public

Robinhood set out to beat Wall Street at its own game. And it did so, but at its customers' expense. It's now set to profit off of retail investors once more through its initial public offering today, having priced its shares last night at the low end of its range, valuing the company at nearly $32 billion.

Co-founders Vlad Tenev and Baiju Bhatt have often cited the Occupy Wall Street movement as the inspiration for founding Robinhood in 2013. The zero-commission trading Robinhood offered seemed revolutionary enough, even though neither is a counter-culture figure. (They met at Stanford, after all.)

They were, however, part of a generation that grew up with Reddit, which is where Robinhood first caught on, with members of the r/WallStreetBets subreddit swapping referral codes to get free stock. Meme stocks made Robinhood famous — or infamous. Now it's set to become the ultimate meme-stock stock.

Robinhood accomplished a remarkable feat of financial engineering. It just happens to do the opposite of what its name suggests.

• Forgoing commissions sounds generous. But Robinhood instead makes money by taking rebates from market makers that execute trades for its customers in what's known as "payment for order flow."
• Robinhood's explanations of payment for order flow have been misleading. "For stocks, our clearing broker Robinhood Securities earns a fixed percentage of the bid-ask spread at the time your trade is executed," Jim Swartwout, the president and COO of Robinhood's clearing subsidiary, wrote in March.
• What he didn't say: That percentage is extraordinarily high, according to a December SEC order fining Robinhood $65 million for failing to meet its "duty of best execution." Most firms take a fifth of the bid-ask spread for themselves and leave the rest to their customers in the form of price improvement. Robinhood, according to the SEC, was taking four-fifths of the spread for itself.
• Robinhood is far, far better at extracting trading revenue from customers than bigger competitors like Charles Schwab, TD Ameritrade and E-Trade, as Protocol's Tomio Geron reported. That's because of the bigger cut it takes; because its investors trade more frequently; and because they are more prone to trade options.
• Options are more lucrative than regular stock trades. And there's another misleading disclosure: Swartwout said Robinhood makes $0.0023 per equity share traded. What he didn't say, though, is how much more it makes on options.

And now Robinhood is opening up its IPO to its own retail traders. Robinhood app users can sign up to buy some of Robinhood's own shares directly, rather than wait until after they start trading. That may look like a move to democratize finance, but there are questions here, too.

• Insiders are selling some of the shares being offered to the public, which goes against the usual practice of locking up early investors and executives for a period of time.
• Retail investors could get as much as 35% of the shares being sold in the offering. But because Robinhood is doing what's known as a "low-float" IPO, public investors overall will own just about 7% of the company's shares outstanding, and IPO Access buyers will own at most 2.5% of the company.
• Owning those shares won't give Robinhood customers much of a say. Tenev and Bhatt will control 65.4% of the company's voting shares through a dual-class structure.

Robinhood is going public despite a new regulatory embarrassment. As the company noted this week in an updated filing, FINRA, the brokerage industry's self-regulatory body, is investigating why Tenev and Bhatt, among other key personnel, lack brokerage licenses.

• "This is more evidence of their habit of snubbing their noses at long-standing protections for investors," Stephen Diamond, a professor and corporate governance expert at Santa Clara University, told Protocol's Ben Pimentel.

But Robinhood could shake up its Scumbag Steve image by transparently disclosing how much it makes from every trade. And it could get rid of its dual-class share structure.

• Robinhood could even take some of the money it's currently earning from payment for order flow and give traders fractional shares of Robinhood itself, while still keeping enough to make handsome margins compared to the rest of Wall Street.
• Over time, Robinhood's customers could become its owners. Occupy Menlo Park!

That may be wishful thinking, since Tenev and Bhatt have few incentives to give up their lucrative positions on top of the company. But regulators are taking a closer look at payment for order flow and other ways Robinhood growth-hacked its way to an IPO. Memes are the modern way we tell stories, and there's still a chance for Robinhood to turn into Stand-Up Steve.

— Owen Thomas (email | twitter)

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People Are Talking

Lina Khan said tech platforms contributed to a rise in consumer fraud during the pandemic:

• "Fraud has continued to surge. One reason is that fraud today is supercharged by digital platforms where this conduct is tolerated and even promoted."

• "I haven't seen that article, but that hasn't been my experience."

On Protocol | China: Fearing backlash, Chinese tech giants scaled back their overtime policies, said startup founder Suji Yan:

• "Both the [Chinese] government and the [tech] companies would face enormous public pressure if overworked tech workers start another high-profile protest or if poor labor conditions cause another public uproar in the press."

Companies need to play the long game with China, DWS KGaA's Asoka Woehrmann said:

• "There's always some noise around China and uncertainty. You have to learn to deal with these uncertainties."

Making Moves

Didi is considering going private. That's one way the company may resolve its issues with Chinese regulators, The Wall Street Journal reported.

Allego is getting SPAC'd. The electric car charging company is merging with Spartan Acquisition in a deal valued at $3.14 billion.

Nanosys wants to go public via SPAC, too. If it goes through, the deal would be valued at about $1 billion.

Microsoft acquired startup Suplari, which uses AI to examine company spending and suggests ways to save money.

Walmart and Adobe are partnering on cloud-based retail services, much like Amazon Hub.

Anne Sheehan is Microsoft's next general manager for Ireland. She's replacing Cathriona Hallahan, who said she'd stick around until her replacement was hired.

Cognizant is hemorrhaging staff. It had a record high attrition rate of 31% last quarter, translating to around 350 employees resigning every day.

In Other News

• TSMC is edging out its semiconductor rival. A day after Intel said it would build the most advanced chips, TSMC got regulatory approval to take on the task at a 2nm chip-making facility in Hsinchu, paving the way for the company to help curb a global chip shortage.
• States are going up against Facebook. More than 40 states said they will appeal a court decision made last month that threw out the states' antitrust lawsuit.
• China has another demand for tech companies: Get rid of pop-ups with potentially misleading content. The country told 14 companies, including Tencent, to address the issue by Tuesday, adding onto China's slew of security mandates.
• Google is also introducing a bunch of privacy rules, including requirements for apps to say whether they follow Google Play's family policy and whether app users have a say in data sharing. Apps have until April 2022 to comply with the new policies.
• Some COVID-19 updates:Google, Facebook and Netflix are requiring employees to be vaccinated, and Google and Lyft are delaying their office return date. Apple is requiring masks in the office and in its retail stores, but it's still not mandating vaccines at work. And Twitter is closing its San Francisco and New York offices and putting all other reopening plans on hold.
• Don't miss this NPR story on how rising sea levels are affecting the San Francisco Bay, which in turn is putting Google and Facebook's campuses at risk. Everyone agrees that something needs to be done, but nobody agrees on who should pay for it.
• You can shop through Twitter. Or, at least, Twitter really wants to know if you will shop there. The company is testing a feature that lets businesses list a carousel of products at the top of their profiles, allowing users to visit their page and shop.

One More Thing

See you in the metaverse

"Metaverse" is the buzziest buzzword to hit tech since "blockchain." Facebook announced that it's going all in on the metaverse, but if you don't actually know what that means, Charlie Fink's "Metaverse" might help you understand.

The book includes expertise from over a dozen people in tech who explain everything you need to know about AR and VR, including their place in gaming and social media, and what the metaverse looks like in practice. There's also a companion app called "Fink Metaverse" to help make sense of how it all works in the (sorta) real world.

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