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Robinhood, the trading app used by many retail investors to drive the furious rally in “meme stocks” early this year, has gained characteristics of a meme stock itself.
Shares of the brokerage surged as much as 82 per cent on Wednesday, prompting multiple trading halts on the Nasdaq exchange as its market capitalisation briefly climbed to $71bn.
The rise came less than a week after Robinhood listed in a disappointing initial public offering. This week’s reversal reflected the embrace of the stock by retail investors on social media and the new availability of options contracts tied to Robinhood’s shares, traders and analysts said.
Robinhood’s commission-free transactions attracted legions of retail investors with time and money to spare during the pandemic. The California-based company’s app was a central venue for trading so-called meme stocks earlier this year, as customers organised on social media platforms such as Reddit to bid up stocks such as the distressed theatre chain AMC and the video game retailer GameStop.
But the company also angered many customers in January when it curbed trading in several heavily shorted stocks to meet a margin requirement from its clearinghouse. Some day traders relished the company’s rocky debut on the stock market last week, when it fell 8.4 per cent in one of the worst performances for a flotation of its size.
Momentum picked up in recent days as some big-name investors bought into the stock, including Cathie Wood, who manages the investment fund Ark Invest.
Since the IPO, investor sentiment in Robinhood shares has brightened on social media sites such as Reddit, according to retail investor sentiment tracker Breakout Point. Mentions of its ticker on Reddit surged on Wednesday morning.
Retail investors on Reddit began rallying around the goal of a $60 share price — up from $35.15 on Friday — and there was “considerable cheering for Cathie” Wood, said Ivan Cosovic, founder of Breakout Point.
“It was a very hated IPO in the retail world, but Cathie bought and some retail investors on the sidelines decided to give it a try,” he added. “The rest is Fomo,” or “fear of missing out”.
Data provider Vanda Research noted that retail traders had begun to turn heavily towards the stock on Tuesday, helping send the shares up 24 per cent to close above its listing price for the first time.
Options trading in Robinhood’s shares also began on Wednesday,* according to Chris Murphy, co-head of derivative strategy at trading company Susquehanna International Group. The derivatives, which allow traders to speculate on the potential moves in a stock, have become particularly popular with retail investors in the past 18 months.
Dealers selling bullish call options to investors would typically buy Robinhood stock to hedge their risk pushing the market in an upward direction.
The gain on Wednesday pushed Robinhood’s market valuation briefly above hundreds of blue-chip US companies including carmaker Ford, foods company Kraft Heinz and asset manager T Rowe Price.
By 12.30pm in New York, more than 101m shares had changed hands. The stock had given up about half of its earlier gain but it remained up 33 per cent at $62.19.
When asked on the morning of the IPO if he thought Robinhood would become a meme stock, co-founder Vlad Tenev said: “I don’t know if people have understood the ramifications of what high retail participation in the markets means, but I think fundamentally it’s a very good thing and we are excited to be a part of it.”
*An earlier version of this article incorrectly stated that options trading began on Tuesday