Turning Tables: Is Robinhood Becoming a Meme Stock?​

By Adelina Budulan​
The Story
Despite getting caught in the crosshairs of the law several times this year, Robinhood pushed ahead with its plan to list on the Nasdaq at the end of July. However, the trading platform’s public debut was initially rather underwhelming – it opened at US$38 per share, the lowest price point of its offering range, and fell on its first day of trading (CNBC).

Strikingly, the stock surged to US$85 in a matter of days (Financial Times). It subsequently experienced a rollercoaster of soars and tumbles before nosediving to US$55 at the end of its first full trading week (CNBC). The stock’s volatility prompted Nasdaq to halt trading multiple times throughout the week (Financial Times).

Impact on Businesses and Law Firms
Several reasons have been mooted for the stock’s volatility, including the availability of options trading and the disclosure of a sizeable endorsement by a prominent institutional investor (CNN).

It has also been suggested that Robinhood is becoming a ‘meme stock’ (Financial Times). Typically, a ‘meme stock’ sees dramatic price increases following social media buzz created by amateur investors. Ironically, these are investors who trade on commission-free platforms such as Robinhood itself. As a case in point, Robinhood users perpetuated the infamous trading rallies in AMC and GameStop by coordinating their investments on Reddit. Dubbed as “the stock that enables the stonks”, Robinhood may have just brought the ‘meme stock’ frenzy full circle (Financial Times).

Memes aside, commission-free trading comes with a fair share of qualms. Most notably, regulators have expressed concerns regarding Robinhood’s business model (CNN). The trading platform employs the ‘payment for order flow’ model, meaning that it charges a fee for directing users’ trades to third-party market makers who execute them. It has been argued that this model incentivises Robinhood to encourage users to trade as much as possible, “which could be against the investors’ interests” (New York Times). If regulators decided to step in and limit or ban the ‘payment for order flow’ model altogether, Robinhood’s ability to offer users commission-free trades would be put at risk.

Companies aiming to disrupt the status quo, like Robinhood, will likely seek out law firms that are able to provide regulatory and compliance support without hindering their innovative pursuits. Furthermore, it is crucial for such companies and their advisors alike to understand the increasing role that social media plays within the financial markets. Since the ‘memefication’ of stocks will likely attract pronounced regulatory responses in the future, law firms with the requisite knowledge and expertise will likely be sought after. In this case, Cravath, Swaine & Moore advised Robinhood on its IPO.

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