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Robinhood's Meme inventory standing is fueling the uncertainty surrounding its IPO

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© Reuters. FILE PHOTO: The Robinhood logo can be seen on a smartphone in front of a displayed stock chart in this illustration dated July 2, 2021. REUTERS / Dado Ruvic / Illustration / File Photo

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By Krystal Hu and Echo Wang

(Reuters) – Robinhood Markets Inc thrived thanks to the popularity of so-called meme stocks like GameStop Corp. (NYSE 🙂 with retail investors. The performance of a Meme stock itself is fraught with trading volatility that gives some potential investors a break from their initial public offering.

The monthly active users of the trading app rose from 11.7 million at the end of December to 21.3 million at the end of June, as private investors on social media sites like Reddit talked about stocks like GameStop and AMC Entertainment (NYSE 🙂 Holdings Inc. speculated.

In an unusual move, Robinhood has reserved between 20 and 35% of its IPO shares for private investors who are users of its app. The IPO is expected to price around $ 2 billion later on Wednesday.

Robinhood warned in its IPO filing that retail investor participation could spark a roller coaster ride in its stocks that could prove too risky for those seeking long-term sustainable profits.

A Reuters review of social media posts on sites like Reddit and interviews with Robinhood clients showed that some retail investors were skeptical of the IPO prospects.

Reasons they gave include their assessment that Robinhood's pursuit of a $ 35 billion valuation is unrealistic, the risk that regulators will crack down on Robinhood's business, and the company's imposition of trade restrictions on meme stock trading Flared up in late January.

“I really liked Robinhood, it sparked my interest in investing, it's easy to use and straightforward. I just don't trust them to do the right thing for their customers the next time they're in a tough spot, ”said machinist Zachary Wells, a Robinhood customer in Kansas City, Missouri who has been for more than one Year trades with the app.

A Robinhood spokesman declined to comment.

Robinhood temporarily restricted the purchase of GameStop and other stocks that hedge funds had bet on earlier this year as it was necessary for the financial and operational stability of its platform. This sparked calls for some investors on Reddit to boycott Robinhood's initial public offering.

The brokerage has also been criticized for relying on "payment for the flow of orders" for most of its revenue, receiving fees from market makers for referring trades to them and not charging users for individual trades.

Critics argue that the practice used by many other brokers creates a conflict of interest as it encourages brokers to send orders to whoever pays the higher fees. Robinhood claims that it routes trades based on what is most beneficial to its users and that charging a commission would be more expensive.

Sherrie Hardy, another Robinhood client in Michigan, decided to skip the IPO offers because she was concerned that the newly listed stocks could be volatile. She said she would wait for the first quarterly profit before buying the stock.

Many Robinhood customers are certainly planning to take advantage of the offer and invest in the IPO. Chris Brumby, manager of a Florida construction company and user of Robinhood, said he was considering investing more than $ 20,000 in the IPO after watching Robinhood's online roadshow on Saturday.

"I like the product and I know it will be big business with new cryptocurrency customers once they get their cryptocurrency wallet," said Brumby.

Many IPOs benefit from excluding retail investors, who end up fueling a trading spike on the first day by buying stocks on the open market. By letting many retail investors under the IPO tent, Robinhood makes it less likely that investors will make big profits on day one.

As a sign of potential trading volatility in stocks, some Robinhood users, like Benhamish Allen, a 42-year-old California teacher, are planning to invest "on margin" in the IPO by borrowing from Robinhood to increase their returns.

"It seems silly that I could borrow money from a company and then buy that company back with the money I borrowed," Allen said.

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