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After rising quickly, Robinhood has 18 million accounts valued at $ 80 billion, in response to its IPO submitting

The logo of the trading app Robinhood is displayed on a smartphone.

Olivier Douliery | AFP via Getty Images

Robinhood Markets filed for one of the most anticipated IPOs of the year Thursday and showed rapid growth that resulted in 18 million retail clients and more than $ 80 billion in client assets.

Unlike many recent IPOs, Robinhood was profitable last year, posting net income of $ 7.45 million on net sales of $ 959 million in 2020 versus a loss of $ 107 million on $ 278 million Dollars in 2019, according to Robinhood's S-1 filing with the Securities and Exchange Commission.

However, the brokerage lost $ 1.4 billion in the first quarter of 2021, due to losses related to emergency funding related to the GameStop trading mania in January. The company had revenue of $ 522 million in the first quarter of 2021, an increase of 309% from the $ 128 million in the first quarter of 2020. Options trading makes up about 38% of sales, while stocks and cryptocurrencies make up 25% and 17% of sales, respectively.

The brokerage aims to raise $ 100 million on its public debut.

Robinhood plans to trade under the symbol "HOOD" on the Nasdaq.

In its prospectus, the company announced that it had increased its funded accounts linked to bank accounts from 7.2 million in 2020 to 18 million in March this year, an increase of 151%. Assets under custody rose from $ 19.2 billion in March to around $ 80 billion. The monthly active users amount to around 17.7 million.

Robinhood plans to allot its retail clients between 20 and 35% of its IPO shares.

Goldman Sachs, Citigroup and JPMorgan are among the leading underwriters of the transaction, along with other banks.

New York-based D1 Partners, Sequoia, Kleiner Perkins, Index Ventures, and Google's venture capital arm, GV, are some of Robinhood's largest venture capital investors.

Free trade pioneer

Robinhood was founded in 2013 by current CEO Vlad Tenev and Baiju Bhatt. The company now has 2,100 full-time employees.

The Menlo Park, California-based startup pioneered free stock trading, forcing the entire industry to cut commissions in 2019.

Robinhood offers stock, cryptocurrency, and options trading, as well as cash management accounts. Users can make most of the trades for free. The app earns the majority of its money with the customer's order flow and a paid premium service.

The stock trading firm took in a record $ 331 million order flow payment in the first quarter of 2021, according to a government filing with the SEC – the money brokers receive for referring customer deals to market makers.

"Since much of our revenue is transaction-based (including payment for order flow or" PFOF "), reduced security pricing spreads, reduced trading activity in general, changes to our dealings with Market Makers and any new regulations from, or any prohibitions on, PFOF and Similar practices can result in lower profitability, increased compliance costs, and increased potential for negative publicity, ”the S1 filing states.

Robinhood – whose long-standing mission has been to "democratize" investments – is considered to be the most important gateway for young investors to access the markets.

The app saw record numbers of new, younger traders going public during the pandemic.

This increase has continued into 2021, characterized by frenzied trading in so-called meme stocks. The stock trading app preferred by millennials found itself in the middle of a firestorm amid GameStop's short squeeze, partly fueled by Reddit-fueled retail investors.

At the height of GameStop's rise, Robinhood restricted trading in certain securities due to increased capital requirements from clearing houses.

Robinhood announced on May 20 that it would give retail investors access to IPO stocks, an area long reserved exclusively for Wall Street banks and experienced investors.

Growing pains

Robinhood's impressive growth has been fraught with challenges.

On Wednesday, Robinhood was beaten with the FINRA's largest single fine to date, totaling approximately $ 70 million. The comparison relates to the technical outages Robinhood experienced in March 2020, Robinhood's lack of diligence before allowing clients to authorize option trades, and the provision of misleading information to clients on aspects such as margin trading.

Robinhood has also faced lawsuits because of its multi-day outages during times when trading volumes were high during the pandemic.

"We have grown rapidly over the past few years and have limited operational experience at our current size of business. If we cannot manage our growth effectively, our financial performance can suffer and our brand and corporate culture can be affected," Robinhood said in the section entitled " Risk Factors "of the Prospectus.

Robinhood paid $ 65 million to the Securities and Exchange Commission after it was accused of misleading clients about how the app makes money and fails to deliver the promised best execution of trades. The SEC's indictment came a day after Massachusetts regulators filed a complaint accusing the trading app of predatory marketing to inexperienced investors.

Robinhood was also sued for negligent death by the family of Alex Kearns, a 20-year-old client who took his own life last summer over believing he made big losses using the stock trading app preferred by millennials.

In addition, Robinhood boss Tenev had to testify in February before the Financial Services Committee of the US House of Representatives about the GameStop trade mania. Lawmakers criticized the order flow payment, the subsidy Robinhood receives from market makers like Citadel Securities to enable them to trade.

Paying for the flow of orders is a common practice, but it is often criticized for a lack of transparency.

Robinhood has since taken steps to address some of the controls such as:

Robinhood ranks # 1 on this year's CNBC Disruptor 50 list.

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