Trading app Robinhood Markets has filed confidentially for an initial public offering with the Securities and Exchange Commission (SEC). 

The company — which has been in the spotlight as retail investors fueled a buying boom in the markets this year — decided to proceed with its IPO, though its listing plans could change, Bloomberg reported, citing people familiar with the matter. The company was reportedly valued at $12 billion in Sept. 2020, with that figure rising to about $40 billion last month.

Trading Frenzy

Earlier this year, Robinhood received negative attention after it restricted transactions for certain securities to position closing, including GameStop, AMC Entertainment, Blackberry, and Bed Bath and Beyond, among others. 

The decision came amid extreme market volatility caused by an unprecedented volume of trading by day traders and retail investors who rallied those meme stocks to record heights. “Amid significant market volatility, it’s important as ever that we help customers stay informed,” Robinhood said at the time. 

However, shareholders were not happy and law firm ChapmanAlbin filed a class action lawsuit against Robinhood on behalf of users who suffered losses as a result of investing in GameStop or AMC. The lawsuit alleged that Robinhood recruited social media influencers to encourage individuals to sign up and purchase shares of GameStop and AMC, only to place trading restrictions on the securities a day later.

The accusation came a month after the Massachusetts attorney general claimed that Robinhood used aggressive marketing and advertising tactics like gamification to attract new, often inexperienced customers, while failing to maintain the infrastructure and procedures necessary to meet the demands of its rapidly growing customer base. 

At the time, Robinhood denied the accusations, saying it “worked diligently to ensure our systems scale and are available when people need them.” 

How Robinhood Makes Money

Robinhood generates significant income from payments for order flow, a practice whereby a broker receives compensation and other benefits for directing orders to different parties for trade execution. Independent analysis suggests that payments for order flow generated an estimated $69 million in revenue for Robinhood in 2018, up 227% from the previous year, and accounted for more than 40% of its overall revenue. In the second quarter of 2020, Robinhood generated approximately $180 million from payments for order flow.

Other sources of revenue include a $5 monthly fee for optional membership to Robinhood Gold, which gives the client access to margin loans and investing tools; interest on uninvested cash; lending stocks purchased on margin; and fees on purchases using the company's debit card.

The company has run into controversy for building its payment for order flow into its largest revenue driver. In Dec. 2020, Robinhood agreed to pay the SEC $65 million after the market watchdog charged the online brokerage for failing to disclose to customers that it received payments from trading firms for routing customer orders to them.