Forward of IPO, Robinhood expands dangerous inventory market lending

Robinhood has quickly expanded its enterprise of extending doubtlessly dangerous loans to clients of the stock-trading app within the run-up to its preliminary public providing.

The favored however controversial on-line brokerage confirmed on Tuesday that it has begun the method of promoting shares in Robinhood to the general public for the primary time. The corporate stated in a weblog put up that it had filed confidential paperwork for the IPO with the Securities and Change Fee and that the regulator is reviewing its registration. Robinhood didn’t disclose a timeframe for the general public providing.

In a separate regulatory submittingRobinhood reported earlier this month that its lending to assist clients purchase inventory “on margin” — wherein somebody borrows cash to buy inventory, choices or different securities in hopes of boosting their funding returns — rose by $2 billion within the second half of 2020 As of the tip of the yr, Robinhood had $3.4 billion in excellent margin loans, up greater than 400% from the $650 million it had excellent on the finish of 2019.

Robinhood, launched in 2013, has turn out to be significantly widespread with younger buyers as a result of it affords commission-free buying and selling by means of an app geared to millennial and Gen Z customers raised on video video games and different on-line instruments. Certainly, Robinhood and Sq. Money have been the highest two websites in whole time spent amongst so-called “energy customers” of finance and buying and selling apps who clock extra hours than the common buyer does, in line with a current examine of cellular app utilization developments by World Wi-fi Options.

“Gen Z flocked to Robinhood [and other] buying and selling apps all through the pandemic,” World Wi-fi Options reported, citing a doubling of time clocked on such apps by Gen Z customers from March 2020 by means of February 2021.

Not like different brokerages, Robinhood would not cost stock-trading charges, requiring it to search out different methods to earn money. That features lending cash for a charge so clients can make investments extra money within the inventory market.


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Robinhood prices $5 a month to borrow as much as $1,000 for funding functions. For something above $1,000, buyers must pay an annual rate of interest on the loans. The corporate used to cost an annual rate of interest of 5%, however in December —only a month earlier than GameStop and different “meme” shares took off — Robinhood lower that annual price in half, to 2.5%, making it even cheaper for patrons to borrow and guess on inventory picks.

Many monetary planners and advisers have lengthy warned particular person buyers towards shopping for shares “on margin,” largely as a result of shopping for shares with borrowed cash can rapidly result in sudden losses that exceed what was initially invested. However, Robinhood on its web site says that purchasing on margin affords clients “extra flexibility, further shopping for energy and fewer time ready to entry” their account. It additionally says it will possibly add danger.

A Robinhood spokesperson defended the corporate’s investor-lending practices. “Our margin lending price is without doubt one of the lowest and [most] aggressive charges within the trade and we have now seen margin lending enhance alongside the remainder of our enterprise as we have now welcomed tens of millions of individuals into the monetary system,” the spokeperson wrote in an announcement.

Excessive price of unpaid loans

But Robinhood’s inventory loans haven’t all the time produced constructive outcomes for the corporate and its clients. CBS MoneyWatch reported in February that as of the center of 2020, Robinhood’s clients have been 14 instances extra seemingly to be unable to repay their inventory loans than buyers who borrowed from rival brokerages like eTrade, TD Ameritrade and others.

In 2020, Robinhood wrote off $42 million value of inventory loans that clients did not repay. The corporate stated one other $41 million in loans was vulnerable to ending up in default.

Final month, Robinhood was sued by the dad and mom of Alex Kearns, a 20-year-old buyer who killed himself final yr after mistakenly believing he’d misplaced almost $750,000 in a dangerous commerce by means of the app.

Some specialists advised CBS MoneyWatch they believed the corporate’s aggressive lending might have additionally helped inflate the market bubble in GameStop shares and different so-called “meme” shares. Exercise surged on Robinhood’s app earlier this yr as on-line retail buyers began shopping for up shares of overwhelmed down corporations in a collective transfer towards Wall Avenue’s brief sellers, or buyers who attempt to earn money by betting a inventory will go down in worth.


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That induced these shares to soar 1000’s of share factors in my days. It additionally result in a money crunch at Robinhood. The corporate needed to search emergency funding from enterprise capitalists with a view to meet its regulatory necessities, which rose as a result of so a lot of its purchasers had crowded right into a small variety of risky shares.

Robinhood additionally needed to prohibit buying and selling in these shares. Congress has since held two hearings on the affair, partially to query whether or not Robinhood and a hedge fund that pays the corporate to course of its clients’ trades had acted correctly,

“The margin loans amplified the buying energy and the power of these buyers to drive up GameStop’s inventory worth,” Joshua Mitts, a professor of securities legislation at Columbia College, advised CBS MoneyWatch final month. “What individuals are so upset about is that it was Robinhood’s personal dangerous lending practices that restricted its clients’ capability to commerce and undermined buyers’ confidence within the equity of the market.”

The Related Press contributed reporting to this text.

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