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Tuesday, June 28, 2022

Robinhood IPO’s large retail allotment has Wall Street braced for volatility

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The decision by retail brokerage app Robinhood to reserve an unusually large stake in its initial public offering this week for its own customers has money managers girding for a volatile trading debut. 

The company, which enabled retail investors to drive vertiginous moves in meme stocks, expects to allocate as much as 35 per cent of the 55m shares it plans to sell to investors buying directly through its app.

Robinhood heralded the decision as a means to democratise a corner of the stock market ordinarily roped off for institutions. But it marks a departure from typical IPOs, where 10-20 per cent of the shares are earmarked for the retail segment.

The move creates a quandary for the large institutional investors that can make or break an IPO. Some intend to sit out the listing, fearful that the outsized retail allocation signals lukewarm enthusiasm for the stock by other big money managers, according to a top asset manager who invests in IPOs. Robinhood’s shares are expected to price on Wednesday and begin trading on Thursday, according to people briefed on the matter. 

Others have struggled to compare the potential behaviour of retail buyers in Robinhood’s IPO to historical norms. In traditional listings the retail buying base largely comes from customers with the underwriting banks — often wealthy people who maintain brokerage accounts at such institutions as Bank of America or JPMorgan Chase.

By contrast, half of Robinhood’s customers are novice investors and many opened their accounts in the past year.

Robinhood has said it would allocate shares at random through its IPO Access system, a feature of its platform that allows investors to apply to obtain shares at the IPO listing price for companies that offer their shares to retail customers.

“Everybody expects more volatility in the trading, that’s it,” said one equities trader at a large New York asset manager. “The more stock in retail hands, the more volatile it is.” 

The power of Robinhood’s community of small investors to collectively move share prices came into sharp focus this year. Fuelled by social media, they helped drive meme stocks such as theatre chain AMC and video game retailer GameStop into the stratosphere with little apparent connection to their underlying businesses. Some on Wall Street are bracing for similar swings in Robinhood’s own shares. 

“With this novel allocation to retail investors, the IPO is a black box in terms of how they’re going to allocate and who they’re going to allocate to, versus the investment banks, where you know what is going to happen in the after-market,” said David Erickson, a lecturer at the University of Pennsylvania’s Wharton business school and former IPO banker.

“Most serious investors will wait and see what happens. Maybe Robinhood will become the next meme stock,” he added.

Traders and portfolio managers said they expected that retail traders on Robinhood could drive greater price swings than the hedge funds that make up a portion of the buying base in most IPOs.

And while that could mean a choppy first day of trading, one trader noted there was also the possibility of a large pop, given how traders on Robinhood have turned other companies into must-buy stocks.

Robinhood declined to comment. The Menlo Park, California-based company is seeking a valuation of up to $35bn as it aims to price its shares between $38 and $42 apiece. The stock will trade on the Nasdaq under the ticker ‘HOOD’.

“They may get a ‘meme-bump’ . . . but it’s not sustainable,” said Logan Allin, founder of Bay-area fintech investment firm Fin Venture Capital, who declined to join Robinhood’s earlier funding rounds. “The hype will be shortlived.”

The lock-up for institutional investors, a period in which they are not permitted to sell their shares, will be 125 days after the IPO, according to the prospectus, which Allin and other experienced investors said was unusually short. The average lock-up is more than 180 days, according to Dealogic data.

Retail investors can sell their shares as soon as the stock begins trading, adding to investor anxieties that DIY investors will be more likely than large institutions to sell positions, pressuring the share price. However, if retail investors who bought through Robinhood directly sell within 30 days, the company will ban them from IPO Access for two months.

“We’d never rule anything out, especially with 35 per cent of the deal being placed with Robinhood customers,” the institutional investor said. “They don’t care about valuation in a lot of things they traffic in.”

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