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ROBINHOOD’S IPO COULD TURN THE TRADING PLATFORM INTO A 35 BILLION DOLLAR CONCEPT

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  • US share and crypto trading platform Robinhood is expected to list on the Nasdaq on 29 July
  • The company will trade under the ticker HOOD
  • Stock expected to be priced between $38 – $42 per share
  • Listing would put a value on the company of around $35 billion
  • Robinhood is under the regulatory spotlight following the GameStop craze
  • UK investors can’t participate in IPO but can buy shares when trading begins

 

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown

‘’There is likely to be huge interest in Robinhood’s IPO, given the swirling speculation about the company on social media forums and the media coverage the company received as it became a central figure in the GameStop craze earlier in the year.

The company was set up to help further democratise investing in the US and draw more ordinary traders into the Wall Street world. If the stock does list within the range of $38 – $42 per share, this will turn out to be a $35 billion dollar idea. But the company has come under the regulatory spotlight and that could have a big impact on the company’s future potential as an investment.

The app has come under fire for the so called ‘gamification’ of investing with the use of rewards and celebratory notifications to encourage users to trade more. Its strategy is paying off with the number of accounts increasing to 18 million by March this year from 7.2 million in March 2020.

The way that Robinhood makes money has also come under intense scrutiny. Instead of charging investors a dealing commission, it puts clients’ trades through certain companies, and in return, these companies pay Robinhood a fee. It’s these charges, called “payment for order flow” that make the company most of its money.

Even though each fee is a tiny fraction of a cent per share traded, it soon adds up. Over the last year Robinhood made $720m from payment for order flow – three quarters of its total revenue. That rose to 81% of revenues in the first 3 months of this year.

But this model is now under review, with the US regulator, the Securities and Exchange Commission (SEC) planning to look again at the stock market trading rules, which could include payment for order flow.

The concern is that it stops investors from getting the best price for their deals and could create a possible conflict of interest between firms like Robinhood and their clients. Firms promise to trade at, or at better than, current market price. But the question remains about whether, under the system, there are even better prices available with other market making companies, which they don’t use. If rules do change this could be a big worry for the firm’s revenues and future investors in the company. It was enough for Robinhood to highlight a potential ban on payment for order flow as a key risk in its prospectus.

This isn’t the first time Robinhood has come under fire from US regulators. In December last year, Massachusetts securities regulator accused Robinhood of gamifying investing. The case included a customer, with no investment experience, who traded 12,700 times in six months. More recently, the Financial Industry Regulatory Authority fined Robinhood a record $70m. It said the company had caused “widespread and significant harm” to investors.

And there could be more storms gathering on the horizon. The Robinhood prospectus named seven US state and federal bodies investigating the company. All this could add up to potential issues down the line, so investors need to take such risks into the equation when they consider investing right from the start of Robinhood’s listed life.

If Robinhood can bat away these issues, or if the SEC decides not to change the current rule book, the groundswell of support among day traders the company has already gathered could potentially accelerate, leading to further growth for the company.’’

 

How to buy Robinhood shares

UK investors can’t take part in the Robinhood IPO. But HL clients should be able to buy Robinhood shares once they start trading on the US stock market which is expected to be on 29 July. If you believe in the long-term prospects for Robinhood and want to buy the shares, you first need to choose an account to hold the shares in. Once listed on the stock market, you can hold Robinhood shares in a general investment account (Fund and Share Account), ISA or Self-Invested Personal Pension (SIPP). Before you buy your first US share with HL, you’ll also need to complete a W-8BEN form.

On the first day of trading, it can take several hours to get a live market price. During this time, it isn’t possible to buy or sell the shares. Investors will be able to deal the shares through HL once there’s a live market price, and trading and settlement has been confirmed by the UK clearing and settlement service. This could be after the shares have already started trading on the stock exchange.

 

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FOMO, FOLO, AND THE VOLATILITY CONUNDRUM

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By

Katharine Wooller, Managing Director, UK, Dacxi

 

‘There is a lot of surface noise in the cryptocurrency space and most of it is the psychobabble of investor sentiment. One week it is the sound of everybody rushing towards a feeding frenzy. The next the wailing and gnashing of teeth as those near the surface (the ones most exposed) get spooked and rush the other way, falling over each other in the race to escape.’

I wrote the above paragraph on June 11th as the introduction to an article I was asked to contribute to a national newspaper.

The piece was essentially about what drives the roller-coaster of cryptocurrency prices – a pattern I have often referred to as ‘exquisite volatility’.

 

IT’S EASY TO OVERTHINK IT

Day to day volatility is something that market analysts and crypto critics alike are obsessed with on a day-by-day basis. In my view they overthink it. The main thrust of my argument in June, with crypto prices tanking, was that ‘buying the dip’ is a tried and tested strategy. At that time Bitcoin was priced around £25,000. Over the next few weeks, it then ticked down even further to £21,762 on July 20th.

At time of writing, about a month later, it’s around £32,680 or US$44,700. If you follow certain online forecasts, pundits are now suggesting Bitcoin could push the $100,000 barrier before the year is out. But, as I said above, it’s easy to overthink things, and sensational predictions make headlines.

 

IT’S INVESTOR SENTIMENT THAT REALLY DRIVES PRICES

Cryptocurrency in general is currently trying to find its identity. Is it a currency or is it a commodity? Is it something you ‘trade in’ or is it something you use to ‘trade with’ – i.e., use to buy other goods? Currently short-term prices are being driven by traders not users – nothing wrong with that, the function of any market is to allow people to buy and sell and make a profit through matched bargains.

The value of any commodity is only what somebody is prepared to pay for it, or what they can sell it for. On a speculative basis, rising values are driven by fear of missing out (FOMO) when the price is on the way up, which ramps the price up.  Downward values are driven by fear of losing out (FOLO) when the price starts dropping and the feeding frenzy turns into a selling frenzy.

Interestingly, traders measure their success not by what they can afford to buy with their crypto wallet, they measure success in terms of converting gains back to their local fiat currency – which rather misses the point of why Satoshi wanted to create a DeFi world in the first place.

 

THE RISK OF GAMING THE MARKET

The fact is that most traders are gaming the market. The risk is that there are some really big swinging crypto traders out there who can influence the market. Playing ‘coin’ like a computer game has inherent risks – rather like trying to predict when a murmuration of starlings over Brighton pier will change direction. I believe that as the market continues to mature and cryptocurrencies follow their destiny to become the enabler of decentralised finance on a global basis, the margins for traders will inexorably tighten.

At Dacxi we take the long-term view. We are firmly ‘buy-and-hold’ investors who, having looked at crypto’s growth curve and analysed the true sense of purpose of DeFi, don’t over-react to the short-term metrics. Dacxi is a wealth building platform and experience has taught us that very few people get rich quick – and more than a few of those that do, get poor again just as quickly.

For most of us building wealth takes a measured view and a measured time frame. From my point of view there’s nothing at all wrong with that!

 

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HOW CHANGES TO PROVIDENT FUND ANNUITISATION AFFECT APPROVED LUMP-SUM DISABILITY BENEFITS

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By Dolana Conco – Regional Executive – Alexander Forbes Retirement Consulting

 

New tax rules on the annuitisation of provident funds and lump-sum payouts made at retirement took effect on 1 March 2021. Fund members should be aware of additional implications for approved lump-sum disability benefits.

On retirement, members of these funds who were under age 55 on this date (known as T-day) may still take amounts which accrued prior to 1 March 2021, plus the fund return, in cash. Members over age 55 on T-day will have access to all amounts in the fund in cash when retiring from that fund. This is referred to as “vested benefits” as opposed to “non-vested benefits” where annuitisation rules apply to amounts above R247 500.

 

Approved lump-sum disability benefits paid by a pension fund

The approved (provided by the fund) lump-sum disability benefit in a pension fund was previously included as part of the fund benefit. It was normally treated in its totality as an ill-health early retirement benefit from the fund. The cash amount was limited to a maximum of one-third of the benefit, while the balance was used to buy a pension.

 

Dolana Conco

Approved Lump-sum disability benefits from provident funds

Those under the age of 55 will have the same limitations on their lump-sum disability benefit and how this is treated in terms of annuitisation as applies to pension funds.

  • Members over age 55 on 1 March 2021

The lump-sum disability benefit will be part of the vested benefits in the provident fund of which the member had membership on T-day. This means that the member can receive this payment in cash, after tax.

But if the member transfers to a new fund after T-day, and is then disabled, any lump-sum disability benefit paid out of the new fund will be a non-vested benefit. This means that annuitisation rules will now apply.

  • Lump-sum disability benefits under 55

Only amounts which have accrued before T-day fall into vested benefits. If a member is disabled after T-day, the lump-sum disability benefit payable will not fall into the vested benefits. The payment will be treated as a non-vested benefit. This means that the annuitisation rules, where the total benefit exceeds R247 500, will now apply to the lump-sum disability benefit.

 

Reform

While the above may be an unintended consequence of the annuitisation rules, we should take a step back and reconsider the real intention of reform.

Various stakeholders in the industry introduced and agreed upon reform as it became evident that current regulations were failing the member. Almost 50% of members retire on less than one-third of their final average salary, which renders a large part of people poor and dependent on the state. This is unsustainable and needs to change.

Reform has brought in different forms of laws to increase the savings culture and provide certain incentives – like a tax deduction if a member saves more, up to a certain limit.

With the lump-sum disability benefit now subject to annuitisation, funds need to consider this question: Would an income structured benefit still meet the intention and expectations by members, the fund and the employer in terms of their incapacity procedure?

The trustees and employer will have to revisit why the approved lump-sum disability benefit was selected in the first place. Was this to ensure that there would be a lump sum to:

  • meet the cost of additional care or adjustments to the home to assist the disabled employee, or
  • provide cash support ultimately to members who are found to be totally and permanently disabled?

If the above intent of providing a lump-sum benefit still stands, the trustees and the employer may need to consider changing the tax status of this benefit from approved to unapproved. This will ensure that the initial intention and expectations are still met.

Caution is made that changing to an unapproved benefit would mean that the employee would need to pay fringe benefit tax on the monthly premium. However, the benefit would be paid as a tax-free lump sum separate from the retirement fund for total and permanent disablement.

These discussions must therefore include decision makers on the employer side to:

  • help facilitate the messaging to the employees
  • manage any payroll impacts
  • align with their incapacity procedures

Any benefit structure implemented must be well considered to best suit the needs of the members. This could enhance the financial well-being of employees and lead to the best retirement outcomes.

 

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