Rivian, FedEx, Cerner, Oracle: What to | Stock Market News Today


Stock futures are down at the end of a week that saw major central banks chart divergent courses as they confront inflation. Here’s what we’re watching in Friday’s action:

Cerner’s stock got a premarket boost after it was reported that Oracle was in talks to acquire the company.



Photo:

Kris Tripplaar/Sipa USA/Associated Press

Chart of the Day
  • Investors say Chinese authorities are likely to ease up somewhat on the embattled real-estate sector and to loosen monetary policy, helping support Chinese corporate borrowers more broadly.

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Robinhood Stock Sale Soured By Investor Confusion, Valuation | Sidnaz Blog


Robinhood Markets Inc.’s


HOOD 3.45%

bid to revolutionize IPOs has created losses for investors instead, after one of the year’s most highly anticipated listings fell flat.

In a regulatory filing in early July, the trading platform’s co-founders said they would open their initial public offering to customers on equal terms with institutional investors. They said they recognized it may be the first IPO many would participate in, and pledged to “never sacrifice the safety of our customers’ money.”

It now appears Robinhood’s commitment to “democratizing” the IPO process played a role in the offering’s big initial stumble Thursday. An innovative auction system sowed some confusion among investors, many already suspicious of the valuation of a business that has drawn scrutiny from regulators and criticism from customers, people involved in the process said.

The stock, initially priced at $38, the bottom of the target range, sits below that. It is a disappointing result at a time when IPOs are booming and investor appetite for new issues is robust.

Robinhood proudly tore up the traditional IPO playbook. It insisted a large chunk of its stock—in the end up to 25%—go to its individual-investor customers compared with the normal retail allocation of well under 10%. It said employees could sell a portion of their stock right away instead of being locked up for six months. And when it came to determining the price of its IPO, Robinhood decided to use a hybrid-auction process, which attempts to assign shares to investors based on what they are willing to pay, regardless of who they are.

Robinhood co-founder Baiju Bhatt, in gray suit, and CEO and co-founder Vladimir Tenev in the Wall Street area of New York City on Thursday.

The hybrid auction has worked in other IPOs in the past year. In typical listings, underwriters give their investor clients updates throughout the roadshow—the seven- to 10-day period in which a company pitches its stock. These updates typically include guidance on how much demand bankers are seeing for the shares and the rough price they ultimately expect to set.

In this case the company and lead underwriters

Goldman Sachs Group Inc.

and

JPMorgan Chase

& Co. gave few such updates, people familiar with the matter said. When some large investors called the other underwriters on the deal, some of those bankers pleaded ignorance.

The opaqueness of the process sowed suspicion among some investors who assumed the deal was going poorly and adjusted their orders accordingly, investors and bankers said.

Many had already expressed concern about how much of Robinhood’s revenue comes from a controversial practice called payment-for-order-flow, which the Securities and Exchange Commission is reviewing, people who attended the roadshow said. Others questioned what they saw as the high valuation the eight-year-old company was seeking—in excess of $30 billion.

Another concern: whether Robinhood’s controversial decision earlier this year to stop users from buying meme stocks like

GameStop Corp.

would prompt some to eschew the offering.

Wednesday night, as bankers met with Robinhood Chief Executive

Vlad Tenev

to set the price, some investors said they were only told it would be within the $38 to $42 target range. This surprised many large institutions, who are used to more guidance heading into a pricing meeting.

A Robinhood IPO event in Times Square.

An unusually large percentage of shares were set to be allocated to hedge funds, which are more likely to “flip” IPO stock on the first day of trading, according to people close to the deal. To bring in more of the biggest institutional funds who are viewed as “buy-and-hold” investors, Robinhood chose $38 a share instead of the higher price some funds were willing to pay.

The company and Goldman felt comfortable that the lower price was conservative enough that the shares would rise on their first day of trading, especially given the buzz around Robinhood in the lead-up to the listing, according to people close to the deal.

Instead, the stock opened at $38 a share, unusual at a time when big initial pops for hot IPOs are more the norm. It rose higher briefly, touching $40 before dropping through the IPO price. It closed down 8.4% Thursday.

The shares fell further still Friday morning before regaining some ground in the early afternoon.

The brokerage app Robinhood has transformed retail trading. WSJ explains its rise amid a series of legal investigations and regulatory challenges. Photo illustration: Jacob Reynolds/WSJ

Robinhood’s Stock Market Debut

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Should You Be Buying What Robinhood Is Selling? | Sidnaz Blog


In rare cases, such pitches have paid off big time. More often, you’d have done yourself a favor by taking roughly half your money and lighting it on fire instead.

Just as Robinhood isn’t the first brokerage to offer commission-free trading, it isn’t the first to seek to “democratize” investing or to sell a piece of itself to its own customers.

On June 23, 1971, Merrill Lynch, Pierce, Fenner & Smith Inc. became the first New York Stock Exchange firm catering to individual investors to offer its shares to the public.

Thirsty for fresh capital in a struggling stock market, Merrill flogged its shares to its own customers, tapping the firm’s “awesome recognition among that vast segment of the population,” reported The Wall Street Journal the next day. “Primarily small investors, the type long championed by Merrill Lynch, quickly purchased the entire amount.”

Nearly 400 insiders at the firm unloaded a total of 2 million shares in the offering. From its initial $28 per share, the stock shot to about $42—a 50% pop—then closed around $39. That valued Merrill at 30.5 times its prior-year earnings, much higher than the overall stock market’s price/earnings ratio of 18.7.

Less than three weeks later, Merrill announced that its net earnings had fallen nearly 50% from the prior quarter.

For the rest of 1971, Merrill’s stock lost 9.4%; the S&P 500 gained 4%, counting dividends.

In 1972, when the S&P 500 rose nearly 19%, Merrill sank 7.7%. And in 1973-74, when the S&P 500 lost 37%, Merrill’s stock slumped by 61%. In its first three full years, Merrill’s stock lost three-quarters of its value; the S&P 500 fell only 5%.

Here in 2021, Robinhood’s offering is one of several trading and investing IPOs:

Coinbase Global Inc.,

the cryptocurrency exchange, went public in April, and

Acorns Grow Inc.,

which helps users invest in tiny increments, said in May that it expects to go public later in the year. Since its Apr. 14 debut, Coinbase is down about 27%. Robinhood fell 8% on its first day of trading Thursday.

One of Wall Street’s oldest and frankest sayings is “When the ducks quack, feed ‘em”—meaning that whenever investors are eager to buy something, brokers will sell it like mad.

Back in 1971, that was the brokers’ own shares. Roughly half a dozen major firms sold stock to the public soon after Merrill, including Bache & Co. and Dean Witter & Co. By 1974, according to data from the Center for Research in Security Prices LLC, several of them had dealt losses at least as devastating as Merrill’s.

In 1987, Jane and Joe Investor got invited to join in on the fun of Charles Schwab Corp.’s IPO, when roughly three million of the offering’s eight million shares were reserved for employees and customers of the firm.

Unlike Merrill, which was rescued from the brink of failure in 2008 when

Bank of America Corp.

bought the firm, Schwab went on to generate spectacular long-term performance. Over the full sweep of time since its 1987 IPO, Schwab is up more than 26,500%, or 17.9% annualized. The S&P 500 gained less than 3,500%, or an average of 11.3% annually.

However, Schwab went public in late September 1987. Only 18 trading days later, on Oct. 19, the U.S. stock market took its biggest one-day fall in history, plunging more than 20%.

Schwab’s stock got brutalized. In their first year, Schwab’s shares fell 59.1%. After three years, the market as a whole had gained 0.6% annually; Schwab’s stock lost an annualized average of 6.9%, according to CRSP.

How many of the original buyers in 1987 stuck around long enough to reap the giant rewards that came much later? That’s impossible to know, but the likeliest answer has to be: very few.

Every once in a while, outside investors in a brokerage IPO do well.

Goldman Sachs Group Inc.

began trading on May 4, 1999. If you’d bought Goldman stock in the IPO and held it ever since, you’d have earned 9.1% a year, versus 7.6% in the S&P 500, according to FactSet.

Yet Goldman was a giant then, as it is now; it was late to the IPO party because it had held on to its partnership structure for so many years. Most brokerage IPOs, like Robinhood’s, occur when the firms are younger and smaller.

That makes them typical. Companies selling shares to the public for the first time tend to be small, with minimal profits; they also require additional invested capital to sustain their rapid growth.

That’s what Savina Rizova, global head of research at Dimensional Fund Advisors, an asset manager in Austin, Texas, calls “a toxic combination of characteristics that points to low expected returns.”

On average, IPOs have severely underperformed seasoned stocks in the long run. And, history suggests, brokerages doing IPOs are better at timing the market for themselves than for you.

Write to Jason Zweig at [email protected]

More from The Intelligent Investor

The brokerage app Robinhood has transformed retail trading. WSJ explains its rise amid a series of legal investigations and regulatory challenges. Photo illustration: Jacob Reynolds/WSJ

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Robinhood IPO Is No Giveaway | Sidnaz Blog


Robinhood Markets likes to give away free shares to attract new customers. Its public offering to investors is a different matter.

The offering bears some similarity to recent IPOs such as

Coinbase Global

and

Rocket Cos.,

which made their debut in the midst of crypto and mortgage booms, respectively. Investors had the challenge of trying to chart out a normalized earnings and revenue path. So far, neither of those prior examples have worked out for initial public investors.

Robinhood derives the vast majority of its revenue from trading by its customers, including in cryptocurrencies like Dogecoin. In this topsy-turvy market, it will be quite difficult to forecast what that activity level looks like a year from now. Plus, its primary trading revenue source is payment for order flow, one of the most hotly debated topics in finance and in Washington.

Amid that uncertainty, there is one measure that cuts through a lot of the noise: how much an investor would be paying at the IPO valuation per funded account. That is a way to benchmark Robinhood to established peers in the retail brokerage business.

At the proposed IPO price range set on Monday, a funded Robinhood customer account is worth about $1,500 to $1,600. Contrast that to a long-term average of about $2,000 for E*Trade over the past 15 years, before it was acquired for about $1,800 by Morgan Stanley, according to figures compiled by Christian Bolu of Autonomous Research. Charles Schwab, a much broader wealth- and asset-management business, has traded around $3,600 historically, and is closer to $4,000 today.

Vlad Tenev, co-founder and chief executive officer of Robinhood Markets. It will be Robinhood’s broad appeal that is most vital to justifying the IPO price.



Photo:

Daniel Acker/Bloomberg News

So that multiple isn’t by itself wild and suggests that, even if Robinhood has to alter its revenue model, it could still be a viable business just by virtue of the number of customers it has. But it also is giving Robinhood credit for a lot of growth it has yet to achieve. Consider that Robinhood’s typical funded account had about $4,500 worth of assets in custody at the end of the second quarter. The established retail brokers’ typical accounts are well into the six figures.

Yes, Robinhood’s accounts on average trade more. But overall, Robinhood still generates much less revenue out of its customers, in part because they are smaller. In the first quarter, average revenue per user was $137 at Robinhood. By contrast, TD Ameritrade and E*Trade were generating more than $500 around the time they were acquired, according to Autonomous. Charles Schwab was above $600 in the first quarter.

So the per-account price implies that Robinhood will either far better monetize its customers in the future, grow them at a much faster rate, or some combination thereof. Faster growth is much more likely, based on recent history: Schwab added 1.7 million net new brokerage accounts in the second quarter, while Robinhood added 4.5 million funded accounts on net. “Expanding the universe of investors has been, and we expect will continue to be, a significant driver of our market-leading growth,” Robinhood writes in the IPO prospectus.

Meanwhile, per-user revenue trends are already slowing. Preliminary second-quarter results given by Robinhood imply a drop-off in average revenue per user to under $120, with Robinhood noting that, while cryptocurrency and options trading are growing, equities trading activity in the second quarter was lower than it was a year ago.

The company can build on other revenue streams, which include margin loans to customers and cash management. But low pricing is a vital part of the company’s mission to expand its customer base. The company is still building out its securities lending platform, which could generate incremental revenue. In the face of slowing trading activity, though—and that includes crypto in the third quarter, according to the company—it is hard to bank on significant per-user revenue growth in the near future.

So it will be Robinhood’s broad appeal that is most vital to justifying the price. That makes the IPO itself a pivotal moment. Robinhood will be distributing potentially over 20 million shares to its own customers via its own platform. If the deal doesn’t perform well out of the gate for any reason, that could frustrate some of its most engaged customers.

Investors might have to wait for the dust to settle on this offering before thinking about nabbing any Robinhood stock for themselves.

The brokerage app Robinhood has transformed retail trading. WSJ explains its rise amid a series of legal investigations and regulatory challenges as it looks forward to its IPO. Photo illustration: Jacob Reynolds/WSJ

Write to Telis Demos at [email protected]

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Robinhood IPO Expected to Value Trading App at About $33 Billion | Sidnaz Blog


Menlo Park, Calif.-based Robinhood Markets operates a stock-trading platform for individual investors.



Photo:

olivier douliery/Agence France-Presse/Getty Images

Trading app Robinhood Markets Inc. said it expects to raise about $2 billion in its initial public offering, which would give it a market value of about $33 billion, according to a securities filing Monday.

Robinhood would sell about 52.4 million shares in the offering, and other stockholders would sell about 2.6 million. At the $40-a-share midpoint of the offering range, Robinhood would raise about $2 billion.

The Menlo Park, Calif.-based company operates a stock-trading platform for individual investors.

In the first quarter of 2021, Robinhood recorded revenue of $522.2 million, the company said in a regulatory filing. It posted a loss of $6.26 a share. In the first quarter of 2020, the company’s net loss was 23 cents a share on revenue of $127.6 million.

The brokerage app Robinhood has transformed retail trading. WSJ explains its rise amid a series of legal investigations and regulatory challenges as it looks forward to its IPO. Photo illustration: Jacob Reynolds/WSJ

Write to Matt Grossman at [email protected]

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SoftBank Latin America Fund Leads $28 Million Atom Finance | Sidnaz Blog


SoftBank Group Corp.


9984 -0.18%

is investing in startup investing platform Atom Finance, in a bet by the Japanese conglomerate that a retail trading boom is here to stay.

Atom Finance, founded in 2018, lets individuals track investments and research holdings. In addition to SoftBank, existing investors General Catalyst and Base Partners also took part in the latest $28 million funding round. The investment values Atom at around $150 million, said a person familiar with the matter.

Atom was founded by

Eric Shoykhet,

who covered financial services firms and other sectors from 2015 to 2018 at hedge fund Governors Lane. He believed falling trading costs would prompt more individual investors to trade. This meant that they would need new kinds of tools to guide them.

‘The narrative we never bought into was that active investing was dead,’ said Atom Finance founder Eric Shoykhet.



Photo:

Atom Finance

In 2019, major brokerages launched no-commission stock trading to stave off the threat from digital upstart Robinhood Markets Inc. Now, all kinds of brokerages compete against each other for retail traders with free trading having become a booming business. It has been particularly transformative in the past year as more investors with free time during the pandemic have wielded growing power over markets, sending meme stocks such as

GameStop Corp.

soaring.

Atom isn’t a trading platform but it has still been a beneficiary. Hundreds of thousands of users have signed up since its platform launched in 2019. Paying customers increased in the past year, though the firm declined to provide exact details about user numbers.

“We think a lot of that increase in investor participation in markets is here to stay,” said Mr. Shoykhet, 29 years old. “The narrative we never bought into was that active investing was dead.”

Mr. Shoykhet hopes his firm will grow as individuals seek cheap tools to help them invest. A full Atom subscription goes for $9.99 a month, a fraction of how much a Bloomberg Terminal costs.

Atom also plans to license its product to banks and brokerages.

SoftBank led the Series B funding round in Atom through a $5 billion fund it created to focus on Latin America. It reflects SoftBank’s wager that the rise of individuals in U.S. markets will take off in that region too.

This year, Atom pursued a deal on its own to provide products for Banco Inter, a digital bank in Brazil that SoftBank’s Latin America fund has also invested in.

Shu Nyatta,

managing partner for SoftBank’s Latin America fund, said SoftBank later introduced Atom to other portfolio companies in hopes of fueling similar deals.

“The whole idea is to bring high-quality data to people who wouldn’t have access to them,” he said.

Mr. Nyatta said he was drawn to Mr. Shoykhet’s opportunism and willingness to make Latin America a strategic focus. Mr. Shoykhet recently moved to Miami and is planning to open an office there, in part to make it easier to do business with Latin America.

But there is one thing Atom Finance isn’t planning to do for now: It doesn’t want to become a trading application.

Mr. Shoykhet is skeptical about many e-brokerages’ practice of routing trades to big trading firms in exchange for payments. The industry has defended this practice, known as payment for order flow, arguing that it lowers the cost of trading for individuals. Others argue it hurts investors as firms will encourage heavy trading by users to maximize profits—even if those investors take too much risk.

“We don’t think it has users’ best interests in mind,” he said.

Write to Dawn Lim at [email protected]

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Robinhood in Talks to Settle Finra Probes Into Options-Trading | Sidnaz Blog


Robinhood CEO Vlad Tenev



Photo:

Us House Tv Via Cnp/Zuma Press

Robinhood Markets Inc. is in talks to pay a fine to settle investigations into its options-trading practices and outages the stock-trading app suffered in March 2020, according to a securities filing.

The Securities and Exchange Commission, state regulatory authorities and the Financial Industry Regulatory Authority, Wall Street’s self-regulatory arm, are examining Robinhood’s conduct in those matters, including how Robinhood “displays cash and buying power to customers and its options trading approval processes,” the company said in the filing.

Separately, New York’s financial regulator and attorney general, among other regulators, are looking into instances of unauthorized actors taking over the accounts of Robinhood users.

Two subsidiaries—Robinhood Financial and Robinhood Securities—are currently negotiating a settlement with Finra over the outages and the options-trading practices, which could include charges of violations of Finra rules, a fine, restitution to customers and the hiring of a compliance consultant.

The probes could lead to losses of at least $26.6 million, according to the filing.

Robinhood has come under fire for how it handles customer-options trading. Alex Kearns, a 20-year-old student, died by suicide last summer after thinking he had racked up big options-trading losses on Robinhood.

His family recently filed a wrongful-death lawsuit against Robinhood, accusing it of contributing to Mr. Kearns’s death through “misleading communications” about his investments and “virtually nonexistent” customer service. They are seeking unspecified damages.

Write to Peter Rudegeair at [email protected]

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Clearinghouse Urges Faster Trade Settlement Amid GameStop | Sidnaz Blog


The clearinghouse operator whose $3 billion margin call spurred Robinhood Markets Inc. to limit trading in

GameStop Corp.


GME -2.24%

is urging an overhaul of the stock market’s plumbing that could reduce the risk of such a scenario repeating.

The Depository Trust & Clearing Corp. said in a report on Wednesday that Wall Street should speed up the time it takes to settle securities trades to one day from two, and it called for a broad effort by the industry and regulators to achieve that goal by 2023.

In an interview, a DTCC executive said the report was in the works months before the dramatic Reddit-fueled rally in GameStop. Still, the report’s release comes as the DTCC faces an unusual degree of attention because of its role in the GameStop frenzy.

Last week, lawmakers from the House Financial Services Committee grilled Robinhood Chief Executive

Vlad Tenev

over his firm’s controversial decision to restrict trading in GameStop on Jan. 28. The trading limits came at the peak of the stock’s rally, infuriating many Robinhood customers, and they punctured the huge speculative run-up in GameStop.

Executives of Robinhood and other companies testified before Congress Thursday after January’s trading frenzy involving GameStop and other securities raised concerns about the integrity of the U.S. stock market and the rules that govern it. Photo illustration: Ang Li

Mr. Tenev said Robinhood’s hand was forced by the DTCC’s huge margin call, and he called for a shake-up of the clearinghouse’s processes to reduce the burdens that they place on brokers.

Owned by a financial-industry consortium, the DTCC is invisible to most investors, even though it processed a mind-boggling $1.77 trillion of securities trades on an average day last year. After every stock trade, it ensures that shares are delivered to the buyer and cash is delivered to the seller. That process takes two business days and is called T+2 settlement in industry jargon.

To protect against the risk that a buyer or seller will default during those two days, a DTCC subsidiary known as the National Securities Clearing Corp. maintains a multibillion-dollar fund to be tapped in case of such a failure. The NSCC fund is maintained by deposits from brokerages including units of many Wall Street banks as well as some online brokerages, such as

Charles Schwab Corp.

and Robinhood.

When trading volumes rise or markets become more volatile, the DTCC can demand additional deposits from brokerages—which is what happened with Robinhood on Jan. 28. Unable to come up with $3 billion immediately, Robinhood limited buying in GameStop. That made the Menlo Park, Calif.-based brokerage firm less risky according to NSCC formulas and reduced the size of the margin call. Some of Robinhood’s rivals also limited trading in GameStop.

Investors buy and sell stock through their respective brokers, in this example Robinhood and Charles Schwab.

The Depository Trust & Clearing Corp. (DTCC) ensures that the seller is paid and the buyer receives the shares, a process that takes two business days.

OTHER BROKERS’

COLLATERAL

National Securities

Clearing Corp., a

DTCC subsidiary,

maintains a fund

to protect against

defaults during that

two-day period.

The NSCC’s clearing fund is maintained by member

brokers such as Robinhood, Schwab and units of

Wall Street banks. As a member’s risk exposure

grows, the NSCC may demand that it deposit more

money in the fund.

Investors buy and sell stock through their respective brokers, in this example Robinhood and Charles Schwab.

The Depository Trust & Clearing Corp. (DTCC) ensures that the seller is paid and the buyer receives the shares, a process that takes two business days.

OTHER BROKERS’

COLLATERAL

National Securities

Clearing Corp., a

DTCC subsidiary,

maintains a fund

to protect against

defaults during that

two-day period.

The NSCC’s clearing fund is maintained by member

brokers such as Robinhood, Schwab and units of

Wall Street banks. As a member’s risk exposure

grows, the NSCC may demand that it deposit more

money in the fund.

Investors buy and sell stock through their respective brokers, in this example Robinhood and Charles Schwab.

The Depository Trust & Clearing Corp. (DTCC) ensures that the seller is paid and the buyer receives the shares, a process that takes two business days.

OTHER BROKERS’

COLLATERAL

National Securities

Clearing Corp., a

DTCC subsidiary,

maintains a fund

to protect against

defaults during that

two-day period.

The NSCC’s clearing fund is maintained by member

brokers such as Robinhood, Schwab and units of

Wall Street banks. As a member’s risk exposure

grows, the NSCC may demand that it deposit more

money in the fund.

Investors buy and sell stock through their respective brokers, in this example Robinhood and Charles Schwab.

The Depository Trust & Clearing Corp. (DTCC) ensures that the seller is paid and the buyer receives the shares, a process that takes two business days.

National Securities

Clearing Corp., a

DTCC subsidiary,

maintains a fund

to protect against

defaults during that

two-day period.

The NSCC’s clearing fund is maintained by member

brokers such as Robinhood, Schwab and units of

Wall Street banks. As a member’s risk exposure

grows, the NSCC may demand that it deposit more

money in the fund.

In Wednesday’s report, the DTCC said shortening the settlement circle by one day would lead to significant savings among brokerages since they wouldn’t need to post as much margin. The largest component of brokers’ NSCC margin requirements, which is determined by a measure of volatility, would drop by 41%, the report found.

The DTCC wouldn’t be able to unilaterally move to T+1 settlement. Such a shift would need the blessing of the Securities and Exchange Commission, and hundreds of firms would need to update their systems and take part in coordinated industry tests to ensure a smooth transition.

“It’s a fairly large undertaking,” Murray Pozmanter, the DTCC’s head of clearing agency services and global business operations, said in an interview.

But the DTCC stopped short of embracing Robinhood’s call for real-time settlement—or instant processing of trades. If securities trades were settled in real-time, investors would be able to sell stocks and immediately access the proceeds of the sale, rather than having to wait. Mr. Tenev has voiced support for real-time settlement, as have some players from the cryptocurrency markets, where blockchain technology allows transactions to be settled instantly.

The DTCC’s report said real-time settlement would have a variety of major drawbacks. For instance, all stock trades would need to be fully funded at the time the investor executed them. Effectively, this means that margin trading—using borrowed money to buy shares—wouldn’t be possible in its current form. The DTCC also warned that real-time settlement would require a much more complex re-engineering of financial firms’ systems.

SHARE YOUR THOUGHTS

Would you approve of an acceleration of the current two-day settlement period? Why or why not? Join the conversation below.

“T+1 is a welcome steppingstone to real-time settlement,” Mr. Tenev said in a statement. “We look forward to working with lawmakers, regulators and the industry to make this a reality.”

The last big change to the U.S. stock-settlement process was in 2017, when Wall Street moved to T+2 from T+3 settlement. Before that, the last shortening of the process was in 1995, when the industry moved to T+3 from T+5 settlement.

Mr. Pozmanter said industry support for further accelerating the settlement process grew after the coronavirus pandemic, when a surge in volatility and trading volumes resulted in brokers being forced to post more margin at the NSCC.

In 2018 and 2019, the size of the NSCC clearing fund—where those deposits are pooled together—averaged around $7 billion. Last year, that level rose to $13 billion. According to the DTCC, the size of the fund hit a record $36.4 billion in December when

Tesla Inc.

was added to the S&P 500, resulting in enormous trading volumes as index funds snapped up shares of the electric-car maker.

Write to Alexander Osipovich at [email protected]

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Robinhood’s Reckoning: Can It Survive the GameStop Bubble? | Sidnaz Blog


Many startup founders dream of the day their creation claims the top spot in

Apple Inc.’s

app store. For

Vlad Tenev,

Robinhood Markets Inc.’s chief executive, it was more like a nightmare.

Mr. Tenev and his co-founder,

Baiju Bhatt,

had set out eight years earlier to bring the stock market to a new class of investors. With engineers plucked from

Facebook Inc.

and other tech giants, they stripped down the trading experience and eliminated commissions, making buying a share of stock about as easy as posting a photo on Instagram.

It worked. During the pandemic, throngs of amateur investors—homebound, bored and flush with stimulus checks—opened Robinhood accounts to experience the market’s thrills. By the end of December, the firm had amassed about 20 million users, according to people close to it, and weeks later its app hit the top of download charts.

It should have been a moment to celebrate. Instead, Thursday of last week began with a panicked, predawn phone call informing Mr. Tenev that Robinhood needed to come up with billions of dollars if it wanted to open for business in a few hours.

His day ended on prime-time television, with a CNN anchor asking Mr. Tenev if Robinhood was trying to “starve the little guy.” Robinhood’s breakout moment turned out to be the thing that nearly broke it.

The firm that set out to bring investing to the masses had run into the reality of Wall Street, with its tangle of often-expensive regulations, overseers and Byzantine infrastructure. A tech company at heart, Robinhood at times failed to give priority to things like customer service, communications and risk management—staid but essential tasks in the world of finance. It differed from most major brokerage firms in a critical way: It wasn’t part of a well-funded financial colossus that had myriad sources of cash and sprawling compliance teams.

Matters came to a head early on Jan. 28 when the clearinghouse that handles Robinhood’s trades demanded it put up a total of $3 billion to cover the day’s trading, a cushion for the risks created by a stunning run-up in a few stocks, such as

GameStop Corp.


GME 14.58%

, fed by cheerleading on Reddit’s WallStreetBets forum.

The demand, 10 times Robinhood’s daily requirements earlier that week, set in motion a chain of events that included stopping customers from buying the very stocks that made the app so popular.

A demonstrator protested in front of the New York Stock Exchange after Robinhood restricted trading in hot stocks such as GameStop.



Photo:

John Lamparski/SOPA Images/Sipa

Many were furious. For hours—an eternity in markets—as Robinhood executives fretted about how to explain the situation, rumors filled the void. On WallStreetBets, posters floated the theory that Robinhood was shielding hedge funds that were in a bind because they had bet on these stocks to fall. A crowd of angry customers showed up at the firm’s Menlo Park, Calif., offices. Dozens filed lawsuits, and “#DeleteRobinhood” trended on social media.

Yet all the while, big investors were clamoring to get a piece of Robinhood and its explosive growth. The firm’s executives, looking to amass capital in little time, dialed up a long list of existing backers and potential new ones. The deal it reached with some of them was a note convertible into equity at a discount to a future initial public offering price.

It ultimately cut this off at $3.4 billion raised. Only Juul Labs Inc.,

Uber Technologies Inc.

and WeWork have raised more in a single venture-capital round since 2002, according to data provider PitchBook.

The next few months will test Robinhood like no other time since its founding. Mr. Tenev and his team told investors they still plan to take the company public sometime in the first half of the year, according to people familiar with the matter. To do so, he will have to clear the high growth bar set by Wall Street investors while simultaneously repairing Robinhood’s ties with the novice traders who made it go viral.

“We haven’t really been in a situation where we see the intersection of financial services and social media,” Mr. Tenev said in an interview last week. “It’s become a cultural phenomenon.”

He and Mr. Bhatt were Stanford University classmates who got the idea to start Robinhood a decade ago. They were developing software for ultrafast trading firms when the Occupy Wall Street protests inspired them to make a smartphone app that would expand access to financial services beyond the well-heeled.

Robinhood didn’t look like a typical bank or brokerage. Executives touted the share of its workforce made up of engineers, designers and product managers. In 2018, it moved its headquarters into the former campus of the West Coast lifestyle magazine Sunset in Menlo Park, a ranch-style complex with a wood-and-stone central courtyard where workers could eat the breakfasts, lunches and dinners Robinhood provided as a perk.

Mr. Tenev was known internally as “the head” for his focus on numbers and growth, while Mr. Bhatt was called “the heart” for his interest in design and the look and feel of Robinhood’s app, said people close to the firm.

Robinhood co-founder and CEO Vlad Tenev in May 2016.



Photo:

andrew gombert/European Pressphoto Agency

Many of the rank-and-file at Robinhood were unfamiliar with the regulations of finance. Banks and their examiners monitor electronic chats among traders and deal makers to ensure compliance with industry codes of conduct. At Robinhood, some employees were surprised that their communications on Slack, where they discussed work, were accessible to regulators, said people close to the company.

At one point, the Financial Industry Regulatory Authority, Wall Street’s self-regulatory arm, chided employees for joking on Slack about an issue they were working on late into the night, one person said.

A Finra spokeswoman declined to comment. In December 2019, Robinhood agreed to pay Finra $1.25 million to settle claims that it hadn’t made sure customers’ trades were executed at the best prices between late 2016 and late 2017. The company didn’t admit or deny fault but agreed to hire an independent consultant to review compliance practices.

Silicon Valley principles of user engagement and word-of-mouth marketing animated Robinhood’s thinking. It borrowed visual cues from gaming apps, such as confetti that appeared on-screen to celebrate new trades or deposits. One feature asked users to virtually scratch off a mystery card to win a free share of stock.

Gimmicks like wait lists and giving users a free share if they bought a stock for someone else worked to bring in new users and meant less need for traditional advertising.

Robinhood set itself apart by how easy it made trading. Users could buy up to $1,000 worth of stock with a few smartphone swipes after they opened an account—even before their bank transfer to fund the account had cleared. Those who paid $5 a month to join the firm’s premium program could buy $5,000 or more of stock instantly and borrow to buy stocks at an annual rate of 2.5%, very low for what are known as margin loans.

Despite Robinhood’s populist ethos, much of its revenue came directly from Wall Street. Robinhood earned extra income by lending shares of

Tesla Inc.

and other popular stocks to short sellers, who hope to make money by seeing the stock fall.

And like other retail brokerage firms, Robinhood routed customers’ orders to high-speed traders, which paid for the right to execute many of the trades. That business, known as “payment for order flow,” earned Robinhood $687 million in 2020, according to securities filings. In December, Robinhood agreed to pay a $65 million settlement to the Securities and Exchange Commission for misleading customers for years about its reliance on those deals. (Robinhood didn’t admit wrongdoing.)

By March 2020, Robinhood was one of the most valuable startups in Silicon Valley and among the few that could credibly claim to have changed an industry. Months earlier,

Charles Schwab Corp.

, E*Trade Financial Corp. and other big firms had said they were following Robinhood’s lead and taking commissions down to zero.

But Robinhood wasn’t prepared for an onslaught of orders when the pandemic sent stocks plunging. Users who had opened accounts but never funded them or traded showed up en masse to buy and sell, at levels that far exceeded Robinhood’s historical averages and projections, according to a person familiar with the situation. Its systems groaned under the volume, and on March 2 it went offline for most of the day.

While engineers scrambled to fix the problems, Robinhood communicated little to the outside world about what was happening. When Messrs. Bhatt and Tenev published an explanatory blog post the following day, after another morning outage, the explanation was wonky. Robinhood blamed a “thundering herd” effect that triggered a failure of its “DNS system.”

Around that time, Robinhood drew down hundreds of millions from credit lines to meet requirements, imposed by the entity that helps it finalize trades, for collateral against the higher volume and volatility, said people familiar with the situation. It was a preview of January’s chaos.

Co-founder Baiju Bhatt in February 2020.



Photo:

Anastasiia Sapon for The Wall Street Journal

Executives had put together a road map for 2020, including product launches and an expansion to the U.K., but had to abandon it just to keep up with the user growth at its main brokerage business, according to people familiar with their plans.

Though employees had been told the firm’s goal was to provide “insane customer service,” Robinhood had only about 100 people assigned to respond to users’ issues last spring, according to people familiar with the matter. The firm didn’t operate a hotline users could call to seek help. Agents responded only to emails and social-media messages.

Limitations in customer service continued into the summer, when a 20-year-old student named

Alex Kearns

tried to reach a Robinhood customer-service representative in the middle of the night regarding a sophisticated options position. An amateur trader, Mr. Kearns was rattled when he thought his account statement showed he had lost three-quarters of a million dollars.

Mr. Kearns received an automated email reply from the company, according to people familiar with the matter. He killed himself on June 14, leaving a note that asked how someone of his inexperience was allowed to trade so easily. Mr. Kearns’s father declined to comment.

At the time, a relative told The Wall Street Journal that Mr. Kearns appeared to be looking at a figure on his account statement representing one leg of a trade that was losing money, but not the opposing leg that was gaining value.

After reports of the suicide circulated, Mr. Tenev addressed employees at a weekly all-hands meeting, pledging to do better, according to people who listened to the meeting. It took Robinhood until June 19 to publish a letter from Messrs. Tenev and Bhatt announcing a review of its options trading eligibility rules and user interface, along with a $250,000 donation to the American Foundation for Suicide Prevention.

Robinhood hired hundreds more customer-service agents, bringing its total to more than 1,000 at the end of 2020, people familiar with the firm said. While it still doesn’t operate a hotline, Robinhood recently added a feature that allows some customers to request a phone call from a real person, which wasn’t an option previously, the people said.

Heading into 2021, Robinhood had reason to believe it had fixed many of its problems. It had named a former SEC commissioner,

Dan Gallagher,

its chief legal officer in May, giving management more financial and compliance knowhow. In August, it hired Christina Smedley, a

PayPal Holdings Inc.

veteran who formerly handled marketing for Facebook’s cryptocurrency project, to run Robinhood’s marketing and communications teams.

The company had set out to raise an abundance of capital after its scare in March 2020. It expanded bank credit lines. Investment rounds announced in May and August gave it a total of $1.26 billion in fresh equity, more than it had collectively raised previously.

The last investment round valued the company at nearly $12 billion and led executives to believe their balance sheet was sufficiently fortified. They weren’t prepared for the jet fuel that Reddit’s message boards were to pour on retail trading—and Robinhood’s growth.

In the last week of January, hundreds of thousands of traders were opening Robinhood accounts daily to buy GameStop and a few other stocks.

The Robinhood logo.



Photo:

Gabby Jones/Bloomberg News

The simplicity of the firm’s user interface masked the complexity of the different parties that touch each trade. Those include clearinghouses that collect and distribute payments for customers’ orders and officially transfer ownership of stocks.

Clearinghouses can take days to finalize a transaction. To account for the risk that a trade—or a brokerage firm—could fail before the process is complete, clearinghouses require brokerage firms to post collateral each day to guard against potential losses.

Collateral requirements can be unpredictable. The formulas clearinghouses use to arrive at their requests aren’t available to the public. But the amounts are known to go up in volatile times and when a broker’s customers concentrate trading in a small number of stocks.

On Thursday, Jan. 28, before dawn broke on the West Coast, Mr. Tenev and his team frantically strategized how they could lower the day’s $3 billion bill from their clearinghouse. They concluded that if they restricted trading in the most popular stocks, that should be enough to convince the clearinghouse risk was being reduced.

Users would be allowed to sell certain hot stocks. But if they tried to buy, they would see an error message, through code Robinhood’s developers would have to write on the fly, according to a person familiar with Robinhood’s thinking.

Depository Trust & Clearing Corp., which operates the main clearinghouse for U.S. stock trades, agreed. The capital request was reduced to about $1.4 billion. Robinhood already had roughly $700 million on deposit there, meaning it only had to post an additional $700 million.

The firm could afford the lowered tab, especially after it borrowed about $500 million from its bank credit lines. But executives worried that the frenzied trading would combine with its surging growth to bring more big clearinghouse demands. Mr. Tenev worked the phones seeking an emergency infusion that would see Robinhood through the trading boom.

Within hours, it had commitments for more than $1 billion, with much of it wired into Robinhood’s bank account before the end of the day.

The deal took the form of a convertible note that entitled its holders to invest in Robinhood’s eventual IPO at a 30% discount or at a valuation of $30 billion, whichever figure was lower, according to a person familiar with the matter. Some investors who came into the round late did so on terms that were slightly more favorable to the company, this person said.

After Robinhood announced the $1 billion financing on Friday, Jan. 29, executives were surprised at the volume of interest they got from venture capitalists, hedge-fund managers and high-net-worth individuals looking to get a piece of the fast-growing company, according to people familiar with the matter.

Tiger Global Management invested $250 million in Robinhood over the weekend, a person familiar with the matter said. Iconiq Capital LLC, an investment firm whose clients includes wealthy individuals such as

Mark Zuckerberg,

participated in the round and tapped its network of family offices and institutions to see if any wanted in, people familiar with the move said. Investors in venture-capital funds that owned Robinhood shares clamored to be included, some of the people said.

On Monday, Robinhood said it had raised an additional $2.4 billion. Venture-capital firms

Ribbit Capital,

Sequoia Capital, Index Ventures and Andreessen Horowitz were among the big participants. Believing it had more than enough capital, Robinhood loosened the restrictions on buying shares in hot stocks.

Unlike in March 2020, Robinhood didn’t suffer any stock-trading outages during the January frenzy.

One of the firm’s challenges now will be keeping its users happy. In a live stream on Sunday over Clubhouse, an invitation-only social networking app popular in Silicon Valley, Tesla CEO

Elon Musk

asked Mr. Tenev if he had “sold your clients down the river.” Mr. Tenev, whom Mr. Musk called “Vlad the Stock Impaler,” said Robinhood, like other financial firms, needed to comply with regulations.

The company sent customers an email about its decision to restrict stock buying. “We hope you take away this: at Robinhood, we stand with everyday investors participating in the markets,” it read. A Robinhood commercial with the slogan “We are all investors” is expected to air during the Super Bowl on Sunday.

Share Your Thoughts

Do you think Robinhood did anything wrong during the Gamestop debacle? Join the conversation below.

Brad Williams, a 42-year-old investor in Birmingham, Ala., is unconvinced.

Mr. Williams said he opened a Robinhood account about two years ago after he saw the firm marketing a free share of stock for joining. Also a member of the WallStreetBets forum, he joined the sudden rush to buy GameStop in January.

Even though he made money on the trade, Mr. Williams said he is planning to close his Robinhood account. “Before last week, I would have said I enjoyed Robinhood and had no issues,” Mr. Williams said. “This week is a different story.”

Mr. Tenev is expected to appear on Feb. 18 before a House Financial Services Committee hearing titled “Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide.”

Rep. Brad Sherman, Democrat of California.



Photo:

Kevin Dietsch/Pool/REUTERS

Rep. Brad Sherman,

a California Democrat who heads the House Financial Services’ subcommittee on investor protection, said Robinhood should have better communicated with customers about its sudden trading restrictions.

“I don’t think they are in a position to say they are trying to protect their customers,” he said. “That’s like walking into a casino and expecting them to come over to the table and say, ‘Hey, Brad, haven’t you lost enough?’”

Write to Peter Rudegeair at [email protected], Kirsten Grind at [email protected] and Maureen Farrell at [email protected]

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8



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GameStop Day Traders Are Moving Into SPACs | Sidnaz Blog


Special-purpose acquisition companies—shell companies planning to merge with private firms to take them public—are rising more than 6% on average on their first day of trading in 2021, up from last year’s figure of 1.6%, according to University of Florida finance professor

Jay Ritter.

Before 2020, trading in SPACs was muted when they made their debut on public markets.

Now, shares of blank-check companies almost always go up. The last 140 SPACs to go public have either logged gains or ended flat on their opening day of trading, per a Dow Jones Market Data analysis of trading in blank-check companies through Thursday. One hundred and seventeen in a row have risen in their first week. The gains tend to continue, on average generating bigger returns going out to a few months.

The gains in companies that don’t yet have any underlying business underscore the wave of speculation in today’s markets. Merging with a SPAC has become a popular way for startups in buzzy sectors to go public and take advantage of investor enthusiasm for futuristic themes.

But lately, day traders are even putting money into SPACs before they have revealed what company they are buying. At that stage, they are pools of cash, so investors are wagering that the company will eventually complete an attractive deal.

Despite the risks, many are embracing the trade, underscoring how online investing platforms and social-media groups now send individuals flocking to new corners of markets, including shares of unprofitable companies such as GameStop and

AMC Entertainment Holdings Inc.


AMC 53.65%

That trend also is playing out in everything from shares of silver miners to SPACs, which were relatively rare before last year but are suddenly ubiquitous in finance.

“I would just have a bad case of FOMO if I wasn’t in SPACs,” said

Marco Prieto,

a 23-year-old real-estate agent living in Tucson, Ariz., referring to the fear of missing out that is driving many individuals to put money into markets.

He has a roughly $50,000 portfolio and about 60% of his holdings tied to blank-check companies. Some of his positions are early on in shell firms such as

Social Capital Hedosophia Holdings Corp. VI,

while others are based on rumors tied to possible deals by companies including

Churchill Capital Corp. IV.

Share-price performance of existing SPACs without deals announced*

Amount of cash

held by SPAC:

Biotechnology/Life science/Health care

Share-price performance of existing SPACs without deals announced*

Amount of cash

held by SPAC:

Biotechnology/Life science/Health care

Share-price performance of existing SPACs without deals announced*

Amount of cash

held by SPAC:

Biotechnology/Life science/Health care

Share-price performance of existing SPACs without deals announced*

Amount of cash

held by SPAC:

Biotechnology/Life science/Health care

Shares of that company have more than doubled since Bloomberg News reported on Jan. 11 that it is in talks to combine with electric-car firm Lucid Motors Inc. Trading got so frenzied that the SPAC put out a statement a week later saying it wouldn’t comment on the report and that it is always evaluating a number of possible deals. The stock has still been gyrating in the days since.

Investors betting on SPACs even before such reports is extraordinary because the underlying value of a blank-check firm before it pursues a deal is the amount of money it raises for a public listing. That figure is typically pegged at $10 a share. Still, it has become common for investors to buy at higher prices such as $11 or $12 to back big-name SPAC founders such as venture capitalist

Chamath Palihapitiya

and former Citigroup Inc. deal maker

Michael Klein.

In another sign blank-check firms are now frequently traded by individuals, several SPACs and companies that have merged with them recently joined GameStop and AMC on a list of stocks that have position limits on Robinhood Markets Inc., a popular brokerage for day traders. Those restricted include Mr. Klein’s Churchill Capital IV and a few of Mr. Palihapitiya’s SPACs in the

Social Capital Hedosophia


SPCE 2.74%

franchise.

The flood of money pouring in is a concern for skeptics who worry that everyday investors don’t understand the dangers of the trade. Even recent losses in a few hot companies such as electric-truck startup

Nikola Corp.


NKLA -0.39%

and health-care firm MultiPlan Inc. that merged with blank-check firms aren’t deterring investors because of the gains in other SPACs.

“It’s a tremendous amount of speculation,” said

Matt Simpson,

managing partner at Wealthspring Capital and a SPAC investor. His firm invests when SPACs go public or right after, then takes advantage when shares rise and typically sells before a deal is completed. He advertised an expected return from the strategy of 6% to clients, but last year it returned 20%.

Ninety-one SPACs have raised $25 billion so far this year, putting the market on track to shatter last year’s record of more than $80 billion, according to data provider SPAC Research.

Fast gains in the shares can result in big payoffs for their founders and the first investors in blank-check firms like Mr. Simpson. These earliest investors always have the right to withdraw their money before a deal goes through. The traders who get in later don’t have those same privileges, but that hasn’t been a deterring factor.

“If you don’t take a risk, there’s really no opportunity at all,” said

Chris Copeland,

a 36-year-old in upstate New York who started day trading on the platform Robinhood with his girlfriend last month. Roughly three-quarters of his portfolio is tied to SPACs such as

GS Acquisition Holdings Corp. II.

Mr. Prieto checks SPACs on his phone. ‘I would just have a bad case of FOMO if I wasn’t in SPACs,’ he says.



Photo:

Cassidy Araiza for The Wall Street Journal

Trading volumes in many popular blank-check firms have increased lately, an indication of investors’ heightened activity. That trend is even drawing attention from some SPAC founders.

“It worries me,” said veteran investor and SPAC creator

Bill Foley.

Trading volumes have surged in one of the SPACs founded by the owner of the Vegas Golden Knights hockey team, especially since it announced a $7.3 billion deal to take

Blackstone Group Inc.


BX 0.21%

-backed benefits provider Alight Solutions public last week.

One reason traders are getting into blank-check firms when they are just pools of cash is that the time it takes for a SPAC to unveil a deal has dwindled. Blank-check firms normally give themselves two years to acquire a private company, but many these days need only a few months.

SHARE YOUR THOUGHTS

Are you investing in SPACs? Why or why not? Join the conversation below.

It also doesn’t take long for investor speculation about a blank-check firm’s acquisition to build, particularly because SPACs can indicate the sector in which they hope to complete a deal.

Excitement can be triggered by a SPAC pioneer like Mr. Palihapitiya, who sometimes hints to his more than 1.2 million Twitter followers when activity is coming. The former Facebook Inc. executive took space-tourism firm

Virgin Galactic Holdings Inc.

public in 2019 and last month reached a deal with Social Finance Inc.

Even though he invests in a number of blank-check firms other than his own—often when SPACs need to raise more money to complete deals—shares of his own companies can climb following such tweets. One example came Jan. 21, when one of his blank-check firms rose about 4% after Mr. Palihapitiya started a tweet by saying “I’m finalizing an investment in ‘???.’

The SPAC has since given back those gains after no news about an acquisition came out and it was revealed that Mr. Palihapitiya’s investments were in companies unrelated to his own. He declined to comment.

Mr. Palihapitiya also has thrown himself into the frenzy of activity around GameStop trading, publicizing an options trade last week in the stock and taking profits on it.

Reports about possible mergers like those surrounding the Churchill Capital IV SPAC and a possible combination with Lucid Motors also quickly attract hordes of buyers. That blank-check firm is now owned by many individuals, including Messrs. Prieto, Copeland and

Jack Oundjian,

a 40-year-old who lives in Montreal.

“I’m very excited that we have a chance to be able to participate in what could be future unicorn companies,” or startups valued at $1 billion or more, Mr. Oundjian said. He said he views SPACs as long-term investments rather than fast trades, and holdings tied to the sector make up about 30% of his roughly $1.2 million portfolio.

Private companies are flooding to special-purpose acquisition companies, or SPACs, to bypass the traditional IPO process and gain a public listing. WSJ explains why some critics say investing in these so-called blank-check companies isn’t worth the risk. Illustration: Zoë Soriano/WSJ

Write to Amrith Ramkumar at [email protected]

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8





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