Prior to IPO, Robinhood expands risky stock market lending

Robinhood has rapidly expanded its business from expanding potentially risky loans to customers of the trading app in the run-up to its first public offering.

The popular but controversial online brokerage confirmed on Tuesday that it has begun the process of selling shares in Robinhood to the public for the first time. The company said in a blog post that it had submitted the confidential paperwork for the IPO to the Securities and Exchange Commission and that the supervisor was reviewing his registration. Robinhood did not disclose any time frame for the public offering.

In a separate regulatory release, Robinhood reported earlier this month that its loan to help clients buy shares “on margin” – in which someone borrows money to buy shares, options or other securities in hopes of increasing their investment return – by $ 2 billion the second half of 2020. At the end of the year, Robinhood had $ 3.4 billion in exceptional margin loans, more than 400% up from the $ 650 million it had outstanding at the end of 2019.

Launched in 2013, Robinhood has become particularly popular with young investors as it offers commission-free trading through an app aimed at millennials and Gen Z consumers growing up on video games and other online tools. In fact, Robinhood and Square Cash were the top two sites in total time spent among so-called “power users” of finance and trading apps that clock more hours than the average customer does, according to a recent study of mobile app usage trends by Global Wireless Solutions.

“Gen Z streamed to Robinhood [and other] trading apps in the whole pandemic, “Global Wireless Solutions reported, indicating a doubling of the time clock on such apps by Gen Z users from March 2020 to February 2021.

Unlike other brokers, Robinhood does not charge fees for trading, which means it has to find other ways to make money. That includes lending money for a fee so customers can invest more money in the stock market.

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Robinhood costs $ 5 a month to borrow up to $ 1,000 for investment purposes. For anything above $ 1,000, investors have to pay an annual interest rate on the loans. The company had previously charged an annual interest rate of 5%, but in December – just a month earlier GameStop and other “meme” shares declined – Robinhood cut that annual rate in half, to 2.5%, making it even cheaper for customers to borrow and bet on stock picks.

Many financial planners and advisers have long warned individual investors against buying shares “on margin”, in large part because buying shares with borrowed money can quickly lead to unexpected losses that are greater than what was originally invested. is. However, Robinhood says on its website that buying on margin customers “offers more flexibility, extra purchasing power and less time to wait to access” their account. It also says it can add risk.

A Robinhood spokesman defended the company’s practice of lending to investors. “Our lending rate for margin is one of the lowest and [most] competitive rates in the sector and we have seen margin lending increase alongside the rest of our business as we have welcomed millions of people into the financial system, “the spokesman wrote in a statement.

High rate of unpaid loans

However, Robinhood’s equity loans have not always produced positive results for the company and its customers. CBS MoneyWatch reported in February that as of 2020, Robinhood’s customers were 14 times more chance to not repay their stock loans than investors who borrow from rival brokers such as eTrade, TD Ameritrade and others.

In 2020, Robinhood wrote off $ 42 million in equity loans that customers could not repay. The company said another $ 41 million in loans was at risk of ending up in default.

Last month, Robinhood was sued by the parents of Alex Kearns, a 20-year-old customer who killed himself last year after he mistakenly believed he had lost nearly $ 750,000 in a risky trade through the app.

Some experts told CBS MoneyWatch that they believed the company’s aggressive lending had also helped inflate the market bubble in GameStop shares and other so-called “meme” shares. Activity rose earlier this year on Robinhood’s app when online retail investors began buying shares of defeated companies in a collective move against the short sellers of Wall Street, as investors trying to make money by betting a share will go up in price to go.

Former Robinhood staff members have complained about customer service


That caused those shares to go up thousands of percentage points in my days. It also led to a cash crunch at Robinhood. The company had to seek emergency financing from venture capitalists to meet its regulatory requirements, which arose because so many of its clients were in a small number of volatile stocks.

Robinhood also had to restrict trading in those shares. Congress has since held two hearings on the affair, in part to ask whether Robinhood and a hedge fund that the company pays to process its customers trade had done well,

“Marginal lending strengthens the buying power and ability of those investors to increase GameStop’s share price,” said Joshua Mitts, a professor of securities law at Columbia University., told CBS MoneyWatch last month. “What people are so overwhelmed about is that it was Robinhood’s own risky lending practices that limited its clients’ ability to trade and undermined investor confidence in the honesty of the market.”

The Associated Press has contributed to this article.

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