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Robinhood starts trading Thursday. Here’s everything investors need to know

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Robinhood is scheduled to hit the markets Thursday in one of the most highly anticipated initial public offerings of the year.

The stock trading app will trade on the Nasdaq under ticker HOOD, priced at an expected $38 to $42 per share. Robinhood is looking to sell 55 million shares at that range to raise as much as $2.3 billion.

At the top end of the range, Robinhood would be valued at $35 billion, and the co-founders would each own stakes worth about $2.8 billion. Coinbase, which went public in April, has a fully diluted market capitalization of $65 billion. The apps are among the most popular places for consumers to by cryptocurrencies, which have surged in trading in 2021.

Robinhood, whose longstanding mission is to democratize investing, is seen as the main gateway to the markets for young investors. 

The free-trading pioneer has experienced explosive growth in the past few years amid a boom in retail trading. The company estimates its 18 million retail clients and more than $80 billion in customer assets in the first quarter ballooned to 22.5 million users and more than $100 billion in the second quarter of 2021.

Robinhood is the third-largest brokerage based on number of funded accounts, behind Fidelity and Charles Schwab, which purchased TD Ameritrade last year.

Robinhood went after a largely underserved demographic in the retail investing space, providing a significant runway for growth, according to Autonomous Research analyst Christian Bolu. The Menlo Park, California-based app pioneered free trading and forced the brokerage industry to drop commissions in 2019.

“Robinhood serves the [approximately 84 million] U.S. households with [less than $100,000] in wealth that existing retail brokers have largely ignored,” Bolu wrote in a research report. “We size the money app opportunity at [about $120 billion] in revenues implying Robinhood has a significant runway for growth.”

While Robinhood was successful in acquiring clients who were largely left behind by legacy brokerages, their account balances are lower compared with peers, which should give Robinhood a lower valuation, according to MKM Partners.

Robinhood’s IPO pricing implies a roughly $1,350 valuation per active and funded account, based on its estimated 22.5 million accounts as of the second quarter of 2021.

This compares with $2,500 per account for E-Trade, which was purchased by Morgan Stanley, and $2,200 per account for each TD Ameritrade account, based on Schwab’s purchase price, according to the MKM analysis. Autonomous Research estimates Schwab accounts are worth more than $3,600 per funded account.

An unorthodox IPO

Robinhood’s longstanding mission is to lower the barrier to enter the world of finance, and its IPO has been nothing but on brand.

The stock trading app is reserving 20% to 35% of its IPO shares for its own clients, which CEO Vlad Tenev said he expects will be one of the largest retail allocations ever.

IPO shares have historically been set aside for Wall Street’s institutional investors or high-net-worth individuals. Retail traders typically don’t have a way to buy into newly listed companies until those shares begin trading on an exchange, so they miss out on the pop.

However, some analysts said Robinhood may be leaving itself exposed to the whims of the very amateur investors it’s trying to help.

“There’s no doubt that retail traders are much more fickle. The more [Robinhood] sells to retail, the more susceptible they will be to some sort of Reddit super squeeze type of activity,” Greg Martin, managing director and co-owner at Rainmaker Securities, told CNBC earlier this month.

Robinhood’s loose lock-up structure is also unconventional. Employees will be able to sell 15% of their shares immediately after the public debut, compared with the traditional six-month lockup period. After three months, investors can sell another 15%.

Robinhood even had a public virtual roadshow over the weekend, an event historically reserved for investment banks and high-net-worth individuals. The company’s executives invited everyday investors to join the call and spoke on topics from a pool of 2,000 questions.

David Erickson, a finance professor at the University of Pennsylvania’s Wharton School, said investment banks typically don’t like novelty in the IPO process. However, Robinhood is such a high-profile IPO that it’s worth it for the underwriters. Goldman Sachs and JPMorgan are the lead bankers on the deal.

Robinhood is the latest company to change the structure of public offerings. The traditional IPO is rapidly becoming a thing of the past amid the rise in direct listings and special purpose acquisition companies.

I am betting that several of these institutional investors will take a pass especially at a significant valuation step-up from just a few months ago,” Erickson said.

Robinhood will likely be the seventh IPO of 2021 to raise more than $2 billion. The six prior ones are trading below their IPO prices.

Robinhood co-founders Tenev and Baiju Bhatt each are planning to sell about $50 million worth of shares in the IPO. Top investors include DST Global, which owns about 9% of Robinhood pre-IPO. Index Ventures has roughly 13%, NEA has about 13% and Ribbit Capital has approximately 10% of pre-IPO ownership.

Trading slowdown and regulatory risks

Robinhood warned in its updated prospectus that the brokerage could see a slowdown in its epic growth as the retail trading boom cools.

“We expect our revenue for the three months ending September 30, 2021, to be lower, as compared to the three months ended June 30, 2021, as a result of decreased levels of trading activity relative to the record highs in trading activity, particularly in cryptocurrencies, during the three months ended June 30, 2021, and expected seasonality,” Robinhood said in an amended prospectus released last week.

Robinhood, which offers equity, cryptocurrency and options trading, as well as cash management accounts, benefits from more speculative trading practices from its clients. Options trading makes up about 38% of revenue, while crypto is 17% of revenue. Plus, margin and stock lending trading levels have been elevated in 2021.

“Since the lion’s share of Robinhood’s revenue is derived from transactional activity there is a risk that a market downturn or even less turnover could lead to top-line pressures,” said Peter Hobson, senior analyst at Third Bridge. “The last time there was similar gangbusters retail trading growth was in early 2000, which then saw a material decline in retail trading activity after the pop of the dot-com bubble.”

Robinhood also said it anticipates the growth rate of new clients will be lower in the third quarter of 2021 from second quarter “due to the exceptionally strong interest in trading, particularly in cryptocurrencies, we experienced in the three months ended June 30, 2021 and seasonality in overall trading activities,” the filing said.

“It is unclear to us whether the new influx of customers at HOOD will continue to be repeat traders or would behave differently from prior cohorts of users. Approximately 60% of funded accounts on Robinhood were opened in the last 12 months, and a vast majority of them are first-time investors,” said MKM Partners analyst Rohit Kulkarni.

Another major risk to Robinhood’s valuation would be regulatory changes to the firm’s largest revenue source, payment-for-order flow, or the money-brokerage firms receive for directing clients’ trades to market makers. Payment-for-order flow is a controversial practice that has garnered attention from the Financial Industry Regulatory Authority and Main Street.

In the first quarter of 2021, Robinhood found itself in the middle of a firestorm amid an epic short squeeze in GameStop, which was partially fueled by Reddit-driven retail investors. At the height of the so-called meme stocks’ surge, Robinhood restricted trading of certain securities due to increased capital requirements from clearing houses. Robinhood raised more than $3.4 billion in a few days to shore up its balance sheet.

“We think payment-for-order flow is a better deal for our customers, vs. the old commission structure. It allows investors to invest smaller amounts without having to worry about the cost of commissions,” Robinhood CFO Jason Warnick said Saturday at the company’s virtual roadshow.

However, Warnick said Robinhood wants to be fully engaged in the regulatory and political discussion about PFOF. He said that if the model changed, Robinhood and the industry would be able to adapt.

Wharton’s Erickson called Robinhood “the most concerning high profile IPO since WeWork tried to go public a few years ago.” The embattled office-sharing company pulled its IPO in 2019 after investors balked at public numbers and disclosures in its prospectus. 

Robinhood has given no indication that investors have lost their appetite for its IPO. But there are plenty of reasons for concern.

In June, Robinhood was slapped with FINRA’s largest-ever penalty, totaling about $70 million. The company has also faced lawsuits for its multiple days of outages during times when trading volume was heavy during the pandemic. Additionally, Tenev was forced to testify to the House Financial Services Committee in February regarding the GameStop trading mania. Tenev’s phone was seized by federal attorneys in investigations about restricted stock trading.

Robinhood governance seems to be “tone deaf” to these issues, Erickson said.

“Based on significant issues with both their internal controls and regulators, you would have thought that their board would be filled with people that have extensive securities internal control and regulatory experience to compensate for this,” said Erickson, who was formerly the head of global equity capital markets at Barclays. “Unfortunately, that isn’t even close to being the case.”

— with reporting from CNBC’s Michael Bloom and Ari Levy.

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NIH Director Collins calls Israeli data ‘impressive’

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A patient receives his booster dose of the Pfizer-BioNTech coronavirus (COVID-19) vaccine during an Oakland County Health Department vaccination clinic at the Southfield Pavilion on August 24, 2021 in Southfield, Michigan.

Emily Elconin | Getty Images

National Institutes of Health Director Dr. Francis Collins called Israel’s data on Covid-19 booster shots “impressive,” noting that they provided a tenfold reduction in infection for people who received a third dose.

Israel began administering boosters in late July to individuals over 60, giving scientists more time to examine their ability to combat Covid and bolster the waning effectiveness of the initial series of doses. Collins’ comments Thursday came just a day after the Food and Drug Administration approved Pfizer and BioNTech’s Covid booster for high-risk people, including anyone 65 and older.

“Without tipping my hand too much, I will say the data looks really impressive, that the boosters do in fact provide substantial reduction in infection,” Collins said during a discussion on Covid hosted by Bloomberg Philanthropies. “Like a tenfold reduction just within 12 days after that booster, and also a reduction in severe illness, which is the thing we’re most concerned about.”

Collins added that the Israeli data indicated a roughly twelvefold reduction in severe Covid as the nation was starting to experience more breakthrough cases. Pfizer reported on Aug. 25 that recipients of its third doses experienced a threefold increase in antibodies.

The CDC’s Advisory Committee on Immunization Practices, a panel of medical authorities who offer guidance to the agency, will vote Thursday on whether to endorse the FDA’s booster decision. The panel began a two-day series of presentations on boosters on Wednesday to give experts and the public a chance to hear more data before the final vote.

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Here’s what will happen when the Fed’s ‘tapering’ starts, and why you should care

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The Marriner S. Eccles Federal Reserve building in Washington.

Stefani Reynolds/Bloomberg via Getty Images

Likely before the end of the year, the Federal Reserve will start to tiptoe into the unknown.

Central bank officials indicated Wednesday that they’re ready to begin “tapering” – the process of slowly pulling back the stimulus they’ve provided during the pandemic.

While the Fed has gone into policy retreat before, it has never had to pull back from such a dramatically accommodative position. For most of the past year and a half, it has been buying at least $120 billion of bonds each month, providing unprecedented support to financial markets and the economy that it now will start to walk back.

The bond purchases have added more than $4 trillion to the Fed’s balance sheet, which now stands at $8.5 trillion, about $7 trillion of which is the assets bought up through the Fed’s quantitative easing programs, according to the central bank’s data. The purchases have helped keep interest rates low, provided support to markets that malfunctioned badly at the start of the pandemic crisis, and coincided with a powerful run for the stock market.

In light of the role the program has played, Fed Chairman Jerome Powell assured the public Wednesday that “policy will remain accommodative until we have reached” the central bank’s goals on employment and inflation.

Markets thus far have taken the news well, but the real test is ahead. Tapering represents a teeing up of future rate hikes, though they appear to be at least a year in the distance.

“It’s certainly been communicated well, so I don’t think that should be a shock to anybody or cause a disruption to the market,” said Kathy Jones, head of fixed income at Charles Schwab. “The question really is more around asset prices than [interest] rates. We have very high valuations across the board in asset prices. What does this shift away from very easy money do to asset prices?”

The answer so far has been … nothing. The market rallied Wednesday afternoon despite what amounted to a preannouncement for Fed tapering, and roared higher again Thursday.

How things go the rest of the way likely depends on how the Fed stage manages its exit from its money-printing operations.

How it works

Here’s what tapering could look like:

Powell said the official tapering decision could happen at the November meeting and the process would commence shortly thereafter. He added that he sees tapering being finished “sometime around the middle of next year.” That timeline, then, offers a view into how the actual reductions will go down.

If the taper indeed begins in December, reducing the purchases by $15 billion a month would get the process down to zero in eight months, or July.

Jones said she would expect the Fed to cut Treasurys by $10 billion a month and mortgage-backed securities by $5 billion. There have been some calls from within the Fed to be more aggressive with mortgages considering the inflated state of housing prices, but that seems unlikely.

Federal Reserve Chair Jerome Powell testifies during a U.S. House Oversight and Reform Select Subcommittee hearing on coronavirus crisis, on Capitol Hill in Washington, June 22, 2021.

Graeme Jennings | Pool | Reuters

Powell’s general tone during this post-meeting news conference surprised Jones. The chairman repeatedly said he is satisfied with the progress made toward full employment and price stability. With inflation running well above the Fed’s comfort zone, Powell said “that part of the test is achieved, in my view, and in the view of many others.”

“The tone was perhaps a little bit more hawkish than the market expected when it comes to tapering,” Schwab’s Jones said. “That comment that the Fed will finish by the middle of next year, it was like, ‘OK, we had better get a move on here if we’re going to do that.'”

Jones said that Powell’s comments and the Fed’s tapering intentions reflected a high level of confidence that the economy continues to recover from the pandemic-induced recession, which was both the shortest and steepest in U.S. history.

“The Fed is telling us that it collectively expects growth and inflation to be pretty strong over the next year, and they’re ready to withdraw the easy policy,” she added.

A view to a rate hike

What happens after the taper is what’s really important.

The summary of individual members’ rate forecasts – the vaunted “dot plot” – indicated a slightly more aggressive posture. The 18 members of the policymaking Federal Open Market Committee are about split on whether to enact the first quarter-point hike next year.

Officials see as many as three more hikes in 2023 and in 2024, bringing the Fed’s benchmark borrowing rate to a range between 1.75% and 2%, from its current 0 to 0.25%. Powell stressed the Fed will move carefully before raising rates and likely will wait until tapering is complete, but the market will be watching for more hawkish indications.

“The next Fed meeting could be really interesting. It should give us a lot more volatility than we’re seeing now,” said John Farawell, head trader with bond underwriter Roosevelt & Cross. “They did sound more hawkish. It’s going to be data-driven and going to be about how Covid plays out.”

For investors, it will be a new world in which the Fed is still providing support but not as much as before. While the mechanics sound simple things could get complicated if inflation continues to run above the Fed’s expectations.

FOMC members upped their 2021 core inflation estimate to 3.7%, increasing it from the 3% projection in June. But there’s plenty of reason to believe that there’s considerable upside to that forecast.

For instance, in recent days economic bellwether companies including General Mills and Federal Express have indicated that prices are likely to rise. Natural gas is up more than 80% this year and will mean substantially higher energy costs heading into the winter months.

UBS forecasts that economic conditions and the tapering news will start putting upward pressure on yields, driving the benchmark 10-year Treasury to 1.8% by the end of 2021. That’s about 40 basis points from its current level but “should not have a significant adverse effect on borrowing costs for companies or individuals,” UBS said in a note for clients.

Yields move opposite prices, meaning that investors will be selling bonds in anticipation of higher rates and less Fed support.

Analysts at UBS say investors should keep in mind that the Fed is moving forward because it is getting more confident in the economy, and still will be providing support.

“While higher bond yields lower the relative attractiveness of equities, a gradual rise in bond yields should be more than offset by the positive impact from rising earnings as economies return to normal,” the firm said. “Tapering should thus be seen as the gradual withdrawal of an emergency support measure as conditions normalize.”

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Leaders must act at COP26 to prevent climate disaster

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Mayor of London Sadiq Khan pictured on September 23, 2021.

Leon Neal | Getty Images

World leaders must “walk the walk” at the COP26 summit in Glasgow this November to avert a climate catastrophe, London Mayor Sadiq Khan told CNBC Thursday.

Speaking to CNBC’s “Squawk Box Europe,” Khan warned that inaction and delay would have a disastrous impact on the environment, and called on delegates attending the summit later this year to make serious changes. 

“Unless there’s bold action nationally and internationally, I worry about the catastrophic consequences, not just in sub-Saharan Africa, not just in countries in South Asia or the Antarctic, but in cities in America like New York, in Germany and in London, where this summer we’ve faced flash flooding and the consequences of heatwaves,” he said.

During Khan’s tenure as mayor, London has seen the introduction of an Ultra Low Emission Zone, which charges vehicles that do not meet certain emissions standards for crossing its perimeters. Next month, the ULEZ is expanding to include more roads outside the city center. He has also introduced the £22 million ($30 million) Mayor’s Air Quality Fund, which aims to support projects to improve air quality in the city.

However, Khan told CNBC Thursday that regional and city leaders needed support from federal governments to take effective action on climate change.

“COP26 has got to walk the walk,” Khan said, and, referring to the signing of the landmark Paris Agreement in 2015: “In Paris, the world set out what needed to be done — now we need to set out how.”

He added that he did feel somewhat optimistic that Britain’s Prime Minister, Boris Johnson, would take ownership of the issue ahead of COP26 in November.

“The prime minister going to the United Nations and taking a leadership role in relation to the next 40 days gives me optimism,” Khan told CNBC. “I think it’s really important that we as the host of COP26 show moral leadership and real leadership. That means making sure we can together provide the $100 billion required every year [to mitigate the effects of climate change], and also showing the world how we’re going to walk the walk.”

“We’ve got a target in this country to reduce our carbon emissions by 68% by 2030,” he added. “We’ve got to show, over the course of the next few weeks, how we’re going to do that, and that will hopefully influence other countries to follow suit.”

‘Turning point for humanity’

Speaking at the U.N. General Assembly in New York on Wednesday, Johnson dubbed the impending COP26 summit “the turning point for humanity.”

“The world is not some indestructible toy, some bouncy plastic romper room against which we can hurl ourselves to our heart’s content,” he told delegates. “Daily, weekly, we are doing such irreversible damage … In just 40 days’ time we need the world to come to Glasgow to make the commitments necessary.”

He urged fellow world leaders to pledge to achieve carbon neutrality by the middle of the century.

“But if we are to stave off these hikes in temperature we must go further and faster — we need all countries to step up and commit to very substantial reductions by 2030,” Johnson said. “I passionately believe we can do it by making commitments in four areas: coal, cars, cash and trees.”

However, the prime minister faced criticism from environmental group Greenpeace after giving his address.

“The Prime Minister’s quite right to say we’re at a turning point. The truth is that as correct as those words to world leaders are, they ring hollow when set against Johnson’s failure to take decisive action to cut emissions at home,” Kate Blagojevic, head of climate at Greenpeace U.K., said in a statement.

“From ending the search for new oil to finally providing proper financial support to help the public cut carbon from their homes, there really is no end of action the government can and should be doing. The problem right now is they’re is failing miserably.”

Under Britain’s Climate Change Act, the country aims to cut emissions by 100% by 2050 relative to 1990 levels.

Part of the strategy has been the introduction of “carbon budgeting,” which sees limits set on the country’s emissions for five-year periods. In April, the government announced that its sixth Carbon Budget — covering 2033 to 2037 — would “set the world’s most ambitious climate change target into law,” aiming to reduce emissions by 78% by 2035 compared to 1990 levels.

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