(Reuters) – Robinhood Markets Inc is building a platform to “democratize” initial public offerings (IPOs), including its own, that would allow users of its trading app to snap up shares with Wall Street funds, according to people familiar with the subject.
The move could further erode Wall Street’s control over stock market fluctuations. It would be easier to implement for Robinhood’s own IPO, given the way companies and their investment bankers tightly control allocations to investors in new listings.
Currently, Robinhood users and other amateur traders cannot buy shares in a newly listed company until their shares start trading. Since stocks tend to trade higher when they are launched, large funds that receive allocations in the IPO have an advantage. The average trading day on the first day of business listings in the United States in 2020 was 36%, according to data provider Dealogic.
Robinhood plans to split a portion of its shares on offer in its IPO to its 13 million users and use the technology it is building to manage that portion of the offering, the sources said.
Although Robinhood’s technology is new, the concept of reserving shares for users is not. Deliveroo Holdings Plc, a food delivery company backed by Amazon.com Inc. that announced plans this month to list in London, is doing so, although a third-party provider is managing the process.
More innovative are Robinhood’s ambitions to allow users to buy directly from other companies’ IPOs. It would be necessary to negotiate agreements with companies and their brokers and obtain approval from US regulators, the sources said. Robinhood could have an influence in these negotiations, arguing that it would act as a bridge between the IPO and a large pool of investor demand, the sources added.
It was unclear what kind of arrangements Robinhood would seek to put into practice, and no certainty that his ambition will materialize, said the sources, who requested anonymity because the matter is confidential. Robinhood declined to comment.
Providing access to IPOs may increase Robinhood’s appeal to users, some of whom have criticized him because of restrictions imposed on trading heavily stocked “meme stocks”, such as GameStop Corp, after a shopping frenzy driven by Reddit on earlier this year. Robinhood said his clearinghouse forced her to place the restrictions because she did not have enough capital to settle the negotiations.
The move could also boost Robinhood’s valuation on his own IPO, as the offer would price an additional demand for the shares that would normally have arisen only after the stock market debut.
On Tuesday, Robinhood announced that it confidentially filed the paperwork with the United States Securities and Exchange Commission for its IPO. Although the company has not yet released the details, the offer could come in the next few weeks and value Robinhood at up to $ 50 billion, the sources said.
Robinhood’s plans to allow amateur brokers to buy on IPOs represent the latest attempt by Silicon Valley companies to disrupt the traditional IPO. Several companies, including Slack Technologies and Palantir Technologies Inc, have listed directly without using investment bankers.
The move would antagonize Wall Street, which is used to receiving large allocations in IPOs. Fund giants like BlackRock Inc and State Street Corp have argued that they are better business owners than day-traders, because they stay with companies in the long run.
The Menlo Park, Calif.-Based company was founded in 2013 by Baiju Bhatt and Vladimir Tenev with the goal of “democratizing finance” by giving people access to markets normally dominated by professional investors.
With the support of investors such as Andreessen Horowitz, Ribbit Capital and 9Yards Capital, its platform allows users to make unlimited transactions without commissions on shares, exchange-traded funds, options and cryptocurrencies.
Reporting by David French in New York and Anirban Sen in Bangalore; Editing by David Gregorio