Robinhood has been in the news over the last few months for all the wrong reasons. The digital, discount brokerage made huge waves after it eliminated all trading fees. This put an incredible amount of pressure on other firms like TDAmeritrade, Charles Schwab, and others to eliminate their fees as well.
Of course, we later found that Robinhood made the bulk of their money on order flow. While it’s not as bad as most people think, their relationship with hedge fund Citadel did raise a lot of red flags and create a number of headaches during the GameStop meme frenzy.
Now, the company is wiping its upper lip and trying to go public. Anyone who bought into this disaster is now wondering what went wrong. That said, most of the market was warning you to walk away from this before it even happened.
Lesson one of all IPOs is simple. This is an exit for a lot of private investors. Almost everyone knows – but sadly not everyone – that private investors are able to sell stakes. So out go all the venture capitalists and drop this bag of whatever onto the public markets.
The stock opened at $38 today. It fell 11%. Why is anyone surprised? After the disaster that was Coinbase (NASDAQ:COIN), this is a company that is facing even worse press.
The company just paid a $70 million penalty due to FINRA violations tied to its outages and due diligence practices around options trading. It is going to have to pay about $30 million for violating anti-money laundering law, according to the State of New York.
And – let’s toss more gasoline on to this fire. FINRA is asking about the trading practices of some of its employees.
My question is this. Where was the SEC during this entire process? You can let a company that is facing securities problems and even criminal investigations go public? This is malpractice.
How to Trade IPOs
One last note. Listen. I avoid IPOs. I don’t do it. I don’t have much of a solid understanding of valuation ahead of time. So, I tend to wait until after the holding period for insiders. That means I’m waiting until employees can start selling their stock. It could be a few months or even longer. But once I have that time period behind me, I start to pay attention.
I will not buy an IPO until after that lockup expires AND the stock has broken above its IPO price. That’s a simple rule that you can use any time to improve your odds of success. The academic data suggests it will give you an edge if you’re willing to wait.