Money Stuff

Robinhood Users Get to Own Robinhood

Also employee trading inquiries, Deutsche Bank cost initiatives, Wu-Tang and intern crime.

By Matt Levine
28 de julio de 2021 11:29 GMT-5

Robinhood retail
The basic way an initial public offering works is:

1. A company hires banks to market its stock to big institutional investors and build a book of demand
from those investors.

2. After reviewing the order book, the company and the banks price and allocate the stock one evening,
selling it to those institutional investors at the market-clearing price that they’re willing to pay.

3. The next day, the stock opens for trading on the stock exchange, and ordinary retail investors get to buy
it. They don’t care what price they pay. So some of the institutional investors who bought the stock in
Step 2 flip it to retail investors on Robinhood for a quick profit. 

In Step 2, the company and the banks try to allocate the stock mostly to long-term shareholders who do not
intend to flip it, which means that there will not be all that much supply in Step 3. And because the retail
investors couldn’t buy it at the IPO price in Step 2, they have to buy it at the public price in Step 3, which
means that there will automatically be demand. Maybe not if it’s a boring company, but if it’s some sexy
consumer-facing tech company then a lot of retail investors will want to buy it in Step 3 and will push up
the price, so there will be a nice “IPO pop”: If you buy at the IPO price, you can sell at a much higher price
the next day.

Everyone knows this, though, so this is only the very first level of the analysis. If everyone in Step 2 thinks
“this is a big sexy consumer tech company so I will overpay for it and then flip it to retail tomorrow,” then
there will be a lot of supply in Step 3 (everyone who bought in the IPO is flipping) and not much demand
(no professional value investor wants to add to its position in the public market, and even retail thinks the
price is too rich), so the stock will actually fall. Most IPOs have a nice pop, but some of the biggest and
sexiest consumer-facing tech IPOs (Facebook Inc., Uber Technologies Inc.) fell in early trading because,
roughly speaking, they were too over-hyped.

Similarly. If you look at the three steps I laid out above, you might say, well, if the retail investors are willing
to pay more than the institutional investors, and IPOs usually pop, why should the institutional investors
get to profit from that? Why shouldn’t the company sell some stock to retail investors in Step 2? This
reduces the number of shares it needs to sell to institutions, which allows it to drive a harder bargain with
them and get a higher market-clearing price, meaning more money for the company and a smaller IPO
pop. (Assuming, as everyone does, that the retail investors are not price-sensitive and will just buy at
whatever price the institutions pay.) And in fact I have argued that this is a good instinct to have and that
Robinhood Markets Inc., the leading brokerage for price-insensitive retail investors, should encourage
companies to do that. 

But this again is all first-order stuff and you have to think about how it will be received. If you are selling
fewer shares to institutions, then in theory you might be able to get a higher price.
1
 But if the reason
that you are selling fewer shares to institutions is that you are selling a bunch of shares to retail
to anticipate and lessen the IPO pop, then the institutions will demand a lower price. “I would pay $50 per

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share if I knew a bunch of retail investors will be waiting to buy from me at $60 the next day, but if you’re
selling stock to any retail investors who want it then that goes away and I’ll only pay $45.” It is not really
clear which effect dominates.

I guess we’ll find out tomorrow? Robinhood is pricing its own IPO tonight:

The company behind the trading app that starred in this year’s meme stock run-up is carving out an
unusually large role for those very same novice investors. On Thursday, when its shares are expected to
begin trading after they price late Wednesday, the wisdom of that strategy will be put to the test.

The interests of bankers, founders and employees may not always align, but they all typically cross their
fingers for a company’s stock price to “pop” much higher once it begins trading after an initial public
offering. That boost is important because it tends to indicate strong demand among individual investors
who couldn’t get their hands on shares before they hit the exchange.

That’s not the case for Robinhood, which has said it will reserve up to 35% of shares for its app users at
the pre-trading range of $38 to $42 apiece. Chief Executive Officer Vlad Tenev said in a live-streamed
roadshow on Saturday that it will likely be one of the largest such allocations to retail investors ever.
 While that decision fits with Robinhood’s self-described mission of “democratizing finance,” it also sets
the company up for a make-or-break moment when its shares begin trading on the Nasdaq Stock Market
under the symbol HOOD.

It’s like any exclusive club: The reason that people want to be able to buy stocks at the IPO price is because
a lot of people can’t; if you let everyone do it, it stops being cool. If retail investors mostly can't buy a stock
at the IPO price, they’ll be lining up to buy it the next day, and if you were special and got to buy at the IPO
price then you can make a quick profit. If everyone buys at the IPO price then there'll be no one waiting to
buy it the next day, and everyone who bought it to make a quick profit will be selling it at a loss.

Or they won’t, of course, because they have diamond hands and like the stock. I have no idea how any of
this will go, and I doubt anyone else does either. People are certainly nervous though:

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. …

“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.” 

Is that right? I feel like the real meme-stock volatility is when retail investors decide to get into a stock that
they aren’t in, when it migrates from institutional hands to retail hands. Like what happened to GameStop
Corp. in January, or what often happens to IPO stocks on their first day of trading. Robinhood is going
to have a lot of retail investors, not because it is allocating a lot of stock to them in the IPO but because it is
Robinhood and its customers are going to buy it one way or another. Allocating a lot of stock to them in the
IPO just makes that transition smoother. I wrote recently:

If you allocate shares to the Robinhood traders to begin with — in the IPO, at a price set mainly by the
institutional investors who care about valuation — then there will be less of a retail rush to buy stock the
next day, and the stock will trade at closer to its IPO price.

I should emphasize that this is not investment advice and I am probably wrong? Like, one, I’m wrong about
every prediction I make, and, two, in this case there keep being articles quoting professionals saying “this
is going to be a wild one” and you should probably believe them instead of me. I am just laying out my
thinking here so we can understand how I’ll be wrong.

Assorted small Robinhood scandals

Here’s an update in Robinhood Markets Inc.’s latest revised prospectus for its initial public offering:
 Beginning on January 28, 2021, due to increased deposit requirements imposed on [Robinhood] by the
NSCC in response to unprecedented market volatility, particularly in certain securities, [Robinhood]
temporarily restricted or limited its customers’ purchase of certain securities, including GameStop
Corp. and AMC Entertainment Holdings, Inc., on our platform (the “Early 2021 Trading Restrictions”). …

We have also received inquiries from the SEC’s Division of Examinations and FINRA related to employee
trading in certain securities that were subject to the Early 2021 Trading Restrictions, including
GameStop Corp. and AMC Entertainment Holdings, Inc., during the week of January 25, 2021. These
matters include inquiries related to whether any employee trading in these securities may have
occurred in advance of the public announcement of the Early 2021 Trading Restrictions on January 28,
2021. 

Obviously it is possible that some Robinhood employee bought GameStop stock, learned that Robinhood
was about to restrict trading in GameStop, and dumped all of her GameStop shares moments before the
restrictions kicked in in order to avoid losing money. And that would be bad and would get her in trouble
with the Securities and Exchange Commission and the Financial Industry Regulatory Authority. It seems
like a weirdly blatant thing to do, and I wouldn’t expect an employee of a regulated broker-dealer to do it,
but, uh, Robinhood sometimes does things that I wouldn’t expect, from a regulatory perspective. 

On the other hand if you were a Robinhood employee who was totally innocently trading meme stocks
during the week of Jan. 25, you might well have totally innocently sold your GameStop on Jan. 27. Perhaps
you bought the stock on Monday, Jan. 25, when it was a meme that everyone was talking about; it closed at
$76.79 that day. By Wednesday, Jan. 27, it closed at $347.51. You might have decided to sell because you
were up like 350%? Like, good trade, well done, take some profits. And then the next day your employer
announces that it has restricted trading in GameStop and, on the one hand, phew, you got out just in time,
but on the other hand, oops, you’re gonna get calls from the SEC and Finra.

I suppose one question here is: Is it good, if a lot of employees of a big retail brokerage are day-trading
meme stocks in their personal accounts? On the one hand, it creates obvious risks of conflict of interest and
trading on inside information, as is suggested by these SEC and Finra inquiries. On the other hand, you do
like to see Robinhood eating its own cooking. It is the leading brokerage for YOLOing meme stocks. Lots of
people, particularly in the financial industry, think that YOLOing meme stocks is bad for you. If everyone at
Robinhood thought that — if none of them were YOLOing meme stocks in their personal accounts — then
that would be awkward; it would suggest that they are knowingly taking advantage of, and encouraging,
poor decisions by their customers. If instead everyone at Robinhood piled into GameStop too, that’s sort of
nice; it suggests that they believe in what they’re selling.

Here’s another update from the prospectus:

Further, on July 26, 2021, [Robinhood] received a FINRA investigative request seeking documents and
information related to its compliance with FINRA registration requirements for member personnel,
 including related to the FINRA non-registration status of Mr. Tenev and Mr. Bhatt. Robinhood is
evaluating this matter and intends to cooperate with the investigation.

See, the Financial Industry Regulatory Authority licenses brokers, and if you work in certain jobs at a
broker-dealer you need a Finra license, and I guess Robinhood Chief Executive Officer Vlad Tenev doesn’t
have one? Honestly this seems like a bit of a silly thing to care about but the rules are the rules. I hope that
Vlad Tenev has to show up at a Prometric testing center to take his Series 7 with a bunch of 22-year-old Wall
Street analysts. You don’t often see celebrities at the Series 7.

Here’s another update that is not from the revised prospectus:

Robinhood Markets Inc. is exploring new features that would let customers invest spare change and
better protect against volatility in cryptocurrency trading, according to code hidden inside a test version
of the company’s iPhone app.

Robinhood is developing an option called “round up investments” that will allow users to invest their
spare change in specific stocks, according to the code, which was part of a version of the app distributed
to beta testers earlier this month. The code also shows that the company is exploring a rewards
program that will give bonuses to those using the round-up feature.

Investing spare change has become an increasingly popular strategy for new stock traders and is a key
piece of competing apps such as Acorns, Chime and Wealthsimple. The code in the Robinhood app
doesn’t indicate where the spare change will come from, but other apps typically connect to a debit or
credit card. They round up purchases to the nearest dollar and automatically invest that difference. For
example, if a user spends $3.75 on a cup of coffee, 25 cents will be put toward a chosen stock.

Or if you spend $8.75 on a large popcorn at an AMC Entertainment Holdings Inc. theater, you can round up
to $9 and get 25 cents’ worth of AMC stock. And if you buy AMC stock, you can get a free popcorn. The
arbitrage here is to spend $9 on popcorn plus stock and then go back to the concession counter and
demand your $8.75 back because you’re a shareholder. This is also not investing advice.

Deutsche Bank is back

I love it:

Deutsche Bank has ditched a cost-cutting target central to chief executive Christian Sewing’s effort to
revive the fortunes of Germany’s biggest lender, telling shareholders that the transformation was now
“significantly advanced” after reporting its best run of profits in almost a decade.
 The bank said on Wednesday it was scrapping its cost-cutting target for 2022, a centrepiece of the
turnround plan Sewing first unveiled two years ago, and raised its full-year revenue target for this year.

The move comes shortly after Deutsche backtracked on a goal of cutting 18,000 jobs, a target set in the
summer of 2019 when Sewing unveiled a radical plan to end more than a decade of disappointing
earnings and scale back the bank’s global ambitions.

Until now the bank’s senior management has repeatedly argued that costs are the key benchmark to
measure the success of the restructuring, because they are the only lever under its control. Sewing’s
predecessor John Cryan was ousted in 2018 after acknowledging that the bank would miss a crucial cost-
cutting target.

The decision to abandon the target came as Deutsche delivered better than expected second-quarter
results, with net profits hitting €692m, comfortably surpassing analysts’ expectations of €372m. The
bank claimed it had generated “sustainable profitability” in the first half of the year.

See, when you’re not making a lot of money in a fickle cyclical business like banking, you say “costs are the
only lever under our control” and you focus on reducing them. You lay people off, you fly coach, you reuse
paper clips, you tell shareholders “look we know things aren’t great but we are doing what we can, with the
paper clips.”

And then you have a nice trading quarter and you’re like “actually it turns out we can totally control
revenues, we have mastered the art of reliably making money trading bonds, nothing can ever go wrong
again, use all the paper clips you want.” 

I’m exaggerating a little — Deutsche Bank will be targeting a 70% cost/income ratio rather than a specific
number of euros of costs — but man is this ever how investment banks work. You can imagine a bank that is
like “we are going to focus on costs throughout the cycle because we don’t want to become bloated and
complacent when times are good,” but you can only barely imagine it.

The Wu-Tang album

Here is a press release that the U.S. Attorney’s Office for the Eastern District of New York issued yesterday
about a unique piece of cultural property that was forfeited to the U.S. government:

A 12-tablet Babylonian version of the Gilgamesh epic, written in Akkadian, was discovered in 1853 in the
ruins of the library of the Assyrian King Assur Banipal in Nineveh (located in modern-day northern
Iraq). The events in the epic revolve around King Gilgamesh of Uruk (located in modern-day southern
Iraq). 
 The government’s investigation showed that in 2003, a U.S. antiquities dealer (the “Antiquities Dealer”)
purchased the Gilgamesh Dream Tablet, encrusted with dirt and unreadable, from a family member of a
coin dealer in London. The Antiquities Dealer and a U.S. cuneiform expert shipped the tablet into the
United States by international post without declaring formal entry. After the tablet was imported and
cleaned, experts in cuneiform recognized it as bearing a portion of the Gilgamesh epic in which the
protagonist describes his dreams to his mother. The protagonist’s mother interprets the dreams as
foretelling the arrival of a new friend. She tells her son, “You will see him and your heart will
laugh.” The names of the hero, Gilgamesh, and the character who becomes his friend, Enkidu, are
replaced in this tablet with the names of deities Sin and Ea. The tablet measures approximately 6-inches
by 5-inches and is written in the Akkadian language.

Oops, sorry, that’s the wrong one. The Gilgamesh tablet was sold by an auction house “to Hobby Lobby
Stores, Inc. (‘Hobby Lobby’), a prominent arts-and-crafts retailer based in Oklahoma City, Oklahoma, for
display at the Museum of the Bible,” and law enforcement seized it. I don’t know what they’re going to do
with it. Give it back to Iraq?

Anyway no here’s the other press release that the U.S. Attorney’s Office for the Eastern District of New York
issued yesterday about a unique piece of cultural property that was forfeited to the U.S. government:

Earlier today, the United States sold the sole copy of the Wu-Tang Clan album “Once Upon a Time in
Shaolin” (the “Album”) which had previously been ordered to be forfeited as a substitute asset in
connection with the approximately $7.4 million forfeiture money judgment (Forfeiture Money
Judgment) entered against Shkreli at his March 2018 sentencing. Proceeds from the sale of the Album
will be applied to satisfy the outstanding balance owed on the Forfeiture Money Judgment. The contract
of sale contains a confidentiality provision that protects information relating to the buyer and price. …

At the time Shkreli purchased the Album in 2015, it was marketed as “both a work of art and an audio
artifact.” The Album includes a hand-carved nickel-silver box as well as a leather-bound manuscript
containing lyrics and a certificate of authenticity. The Album is subject to various restrictions, including
those relating to the duplication of its sound recordings.In September 2017, just weeks after his
conviction but before the district court-imposed forfeiture, Shkreli attempted to sell the Album through
an on-line auction.

Bloomberg reports:

The anonymous buyer of the album was represented by Peter Scoolidge, a New York-based attorney.
“This was the most interesting deal I have ever worked on,” Scoolidge said in a statement.

Ehh I guess? I mean, fine, it’s a box and a book and an associated set of contractual provisions. (We
discussed those provisions, plus some imaginary ones, in the appendix to this post.) I suppose if you are
buying the thing you have to figure out whether you succeed to Shkreli’s contractual rights to prevent Wu-
Tang from releasing more copies of the album; it’d be funny if someone paid the government a lot of
money for this one-of-a-kind Wu-Tang album and then Wu-Tang just put it on Spotify. You’d still have the
certificate of authenticity, though; no one else has that. Unless they type up their own. You’d have the only
authentic certificate of authenticity.

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Obviously the thing that Martin Shkreli bought from the Wu-Tang Clan was a non-fungible token? It was a
non-fungible token rendered in paper and leather and nickel and silver rather than immutable blockchain
code, but still. And then the government seized it and re-sold it, which is a thing it can do, but you can
certainly imagine a more interesting deal? What if the government had securitized Martin Shkreli’s Wu-
Tang album? Or what if it had sold a limited edition of 1,000 non-fungible tokens, each recorded on the
blockchain, each accompanied by a certificate of authenticity signed by the U.S. Attorney for the Eastern
District of Brooklyn, each representing “hey I bought an NFT of the time the U.S. government seized Martin
Shkreli’s Wu-Tang album”? What if the government had held a press conference and said “crime does not
pay, and we will destroy everything associated with this crime,” and then burned the Wu-Tang album on
camera and then sold an NFT of that? What if I sold this section of this column as an NFT? What if someone
filmed Martin Shkreli reading this paragraph and sold that as an NFT? 

Do you remember when NFTs were a big deal? It was only like a couple of months ago.

Get valuable responsibility early

This article about Matthew Grimes, a 27-year-old Wharton graduate who works for Tom Barrack and was
arrested with him on charges of acting as unregistered foreign agents for the United Arab Emirates, is not
really core Money Stuff subject matter, but I do want to spend a minute enjoying the headline, which is
“From Intern to Co-Defendant.” That is really the dream career path. You start out as an intern just making
copies and getting coffee — “aboard Barrack’s private planes, Grimes would graciously serve tea and
crackers, and was sometimes called upon to book restaurant reservations” — but if you work hard and are a
good team player you will rapidly progress. You’ll get face time with the boss, take on increasing
responsibility, be put in front of clients, lead your own deals — Grimes “was also president of a related
special purpose acquisition vehicle” — and, if everything works out just right, you’ll end up charged in the
same federal criminal prosecution as the boss. That’s how you know you’ve made it.
Things happen

The Time Tax. People are worried about bond market liquidity. Credit Suisse’s Archegos Inquiry Rips
Bank’s Due Diligence. Beijing’s threat to VIEs triggers Wall Street angst over China stocks. Spiraling Debt
Crisis Confronts Evergrande Billionaire — and Xi. Chinese Bike-Sharing Startup Hello Scraps Plans for U.S.
IPO. US law firms offer bonuses of up to $250,000 in battle for staff. Hot Housing Market Lets Banks Sell
Mortgage Risk. Retail investors to drive $1.5tn push towards bespoke index funds. “We find that option
expensiveness, as measured by implied volatility, is higher for low-ESG stocks, showing that investors pay a
premium in the option market to hedge ESG-related uncertainty.” Court Documents Reveal Ex-Glencore
Trader’s Political Bribes in Nigeria. HSBC accused of ‘blatant and indefensible’ forex fraud by ex-client. CFA
Pass Rate Plummets to Record Low of 25% for Level 1 Exam. Ethanol, Ethan Allen, Ethereum. “Yonex Co.,
which makes Naomi Osaka’s tennis racquets, has slumped 8% in two days after the superstar unexpectedly
crashed out of the tournament in the third round on Tuesday.” In the battle of the mega-yachts, does
Jennifer Lopez or Alex Rodriguez’s come out on top?

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1 The theory is just that there is a schedule of demand from institutions: Some will buy at any
price, some will buy at $55 but no higher, some at $52, some at $50, some will only pay $45,
etc. You can just line them up in order by price and see how many shares they are willing to
buy: 10 million at no limit, 7 million at $55, 4 million at $52, etc. And you keep counting
down, from high prices to low prices, until you get to the number of shares you need to sell,
and the *lowest* price that you get to is the clearing price. So if you need to sell 50 million
shares you keep counting demand until you get to the 50 millionth share at $45 or whatever. But
if you change your mind and only need to sell 30 million shares, you don’t have to count as
far, and you get to the 30 millionth share at $52. This is not an entirely realistic model of
how IPO bookbuilding works, but it is a decent toy model.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:

Matt Levine at mlevine51@bloomberg.net

To contact the editor responsible for this story:

Brooke Sample at bsample1@bloomberg.net

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