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Robinhood Lays Off 23% of Staff as Retail Investors Fade from Platform

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Robinhood Markets Inc.

HOOD 2.10%

is slashing about 23% of its full-time staff as the flashy online brokerage continues to reel from a sharp slowdown in customer trading activity.

The job cuts mark the second round of layoffs this year at Robinhood, which in April reduced its staff by about 9%. Together, the two rounds have cut more than 1,000 jobs from the company.

The layoffs come alongside a broader company reorganization,

Vlad Tenev,

Robinhood’s chief executive, said in a message posted to the company’s blog. In the statement, Mr. Tenev said the previous round of layoffs in April “did not go far enough” in helping the company cut costs.

“Last year, we staffed many of our operations functions under the assumption that the heightened retail engagement we had been seeing with the stock and crypto markets in the Covid era would persist into 2022,” Mr. Tenev said in the message. “In this new environment, we are operating with more staffing than appropriate. As CEO, I approved and took responsibility for our ambitious staffing trajectory—this is on me.”

Robinhood also moved up the release of its second-quarter results a day earlier than scheduled, reporting its monthly active users tumbled to 14 million, down 34% from a year earlier. Revenue fell 44% to $318 million.

Launched less than a decade ago, Robinhood ushered in a free-stock trading phenomenon during the Covid-19 pandemic, thanks to its easy-to-use, mobile-first online brokerage platform.

By the second quarter of last year—Robinhood’s best, according to public filings—the company boasted more than 21 million active users, who flocked to the app to trade flashy meme stocks, options and cryptocurrencies.

But the pandemic-darling has seen its fortunes unwind this year as markets have tumbled and customers are no longer stuck at home like they were during the Covid-19 pandemic. Revenue tied to customers’ trading activity dropped 55% in the latest quarter to $202 million.

Robinhood’s stock price plunged this year and finished Tuesday at $9.23, down 76% from its initial public offering price last year of $38 a share. Its stock fell 1.6% in recent after-hours trading.

Robinhood scaled up staffing quickly during the Covid-19 pandemic to meet the surge in demand for its services. On the company’s earnings call in April, Mr. Tenev said the company grew its head count to nearly 3,900 in the first quarter of this year from roughly 700 at the end of 2019. Tuesday’s reduction will bring the head count to about 2,600.

In his blog post, Mr. Tenev said all employees would receive an email and a Slack message with their employment status immediately following Tuesday’s companywide meeting where the layoffs were announced. Employees who were laid off will be able to remain employed through October, Mr. Tenev said.

“The reality is that we over-hired, in particular in some of our support functions,” Mr. Tenev said later on the call with reporters. He noted that employees in support, operations, marketing and program management would be most acutely affected.

A number of technology companies have laid off employees in recent months as they grapple with a slowdown in growth and the threat of a looming recession.

Twitter Inc.,

Netflix Inc.

and

Tesla Inc.

are among those that have made staff cuts.

Within the brokerage landscape, Robinhood has found itself more deeply affected by the current market environment. Compared with larger, entrenched players in the industry, Robinhood’s users tend to be younger and have less money in their brokerage accounts. Jason Warnick, Robinhood’s chief financial officer, said Robinhood customers tend to invest in growth stocks and cryptocurrencies. Both categories were hammered by a downturn in markets this year.

In addition to slowing growth, Robinhood has found itself under the watchful eye of regulators. The New York State Department of Financial Services said Tuesday that it imposed a $30 million fine on Robinhood’s cryptocurrency trading unit for alleged violations of anti-money-laundering and cybersecurity regulations.

The company, meanwhile, has encountered questions about the future viability of part of its business model, after Securities and Exchange Commission Chairman

Gary Gensler

earlier this year outlined a revamp of trading rules that could threaten one of the key ways Robinhood makes money.

As its business has struggled this year, Robinhood has increasingly been considered a takeover target by some market watchers, especially in the highly competitive brokerage industry. In May, one of the biggest names in cryptocurrency,

Sam Bankman

-Fried, unveiled a roughly $648 million investment in Robinhood in exchange for 7.6% of the company’s Class A shares.

Any outside investor, including Mr. Bankman-Fried, would face an uphill battle in mounting an aggressive takeover bid for Robinhood, due to a dual-class share structure that gives the majority of voting control to Mr. Tenev and

Baiju Bhatt,

Robinhood’s other co-founder.

Mr. Warnick reiterated on Tuesday’s media call that Robinhood intends to continue as a stand-alone, independent company.

“We’ve got an incredibly strong balance sheet with $6 billion in cash and we’ve got a lot of momentum on the product side,” he said. “To the contrary of being acquired, we actually think that we should be looking more aggressively at opportunities to acquire other companies that would help speed our innovation.”

Mr. Warnick added that Robinhood plans to roll out tax-advantaged retirement accounts later this year, following its earlier launch of other products including a new debit card. Some former employees, customers and analysts, however, have criticized the brokerage for being too slow to unveil new products that could diversify its revenue stream.

Write to Caitlin McCabe at caitlin.mccabe@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Business

Employees Scrambled to Keep Robinhood Afloat in January 2021 Meme-Stock Frenzy, House Report Finds

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Robinhood Markets struggled to handle huge volumes of stock trading and sparred with its principal customer, market maker Citadel Securities, during the week in January 2021 when meme stocks exploded, according to a report from the Democratic staff of the House Financial Services Committee.

The committee held hearings in February 2021, questioning the chief executives of Robinhood and Citadel Securities, as well as meme-stock hero Keith Gill and Gabe Plotkin, the hedge-fund manager who lost billions betting against GameStop and other hot stocks. The staff reviewed tens of thousands of pages of internal documents, including pointed communications inside and between the companies.

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Business

Stocks Pull Back After Last Week’s Rally

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U.S. stocks fell on Tuesday, poised to end the month on a downbeat note after last week’s rally.

The S&P 500 was down 0.4% in afternoon trading, a day after U.S. markets were closed for Memorial Day. After snapping a seven-week losing streak last week, the benchmark index regained ground and was on track to close the month with a slight gain. The Dow Jones Industrial Average shed 0.5%, while the Nasdaq Composite fell 0.1%.

Tuesday’s session will cap another volatile trading month, during which stocks around the world swung wildly as traders tried to assess the outlook for global economies. In the U.S., stocks tumbled shortly after May began and continued falling amid a slew of earnings and economic data that came in worse than expected. 

Throughout the month, profit warnings from companies ranging from

Snap

to

Target

intensified worries about the lingering impact of inflation, and spurred investors to dump shares across several industries.

By mid-May, it seemed the S&P 500 was bound to close in a bear market, defined as a drop of 20% or more from a recent high, before a late-month rally sent stocks higher. The S&P 500 is down about 14% from its January high. 

Professional and individual investors alike waded into last week’s rally in the U.S. markets, finding opportunities to scoop up stocks that have seen their valuations fall. However, the issues that sent stocks declining earlier this month have yet to abate.

Many traders remain worried that the Federal Reserve’s plans to raise interest rates aggressively could tip the U.S. economy into a recession. Meanwhile, concerns about an economic slowdown in China and sustained supply-chain disruptions due to the pandemic and the war in Ukraine have continued to weigh on investors’ minds.

“There’s a bit of market uncertainty just about the pretty rapid rally we’ve had, and whether that can be sustained in a world where inflation is clearly still a factor,” said Brooks Macdonald Chief Investment Officer Edward Park.

European Union leaders took a big step in the economic fight against Moscow over its invasion of Ukraine by agreeing to block 90% of Russian oil imports by year-end. The embargo faced opposition from countries highly dependent on Russian crude, especially Hungary. Photo: Olivier Matthys/Associated Press

New survey data released Tuesday showed U.S. consumer confidence declined slightly in May from the previous months.

Crude prices jumped after European Union leaders said they would impose an oil embargo on Russia over its invasion of Ukraine, but later pared their gains. The sanctions are set to include a ban on insuring ships that carry Russian oil, The Wall Street Journal reported. They would include an exemption for oil delivered from Russia via pipelines, which make up one-third of EU oil purchases from Russia.

Front-month futures for Brent crude, the global benchmark, rose 1% to settle at $122.84 a barrel. West Texas Intermediate, the U.S. marker, slipped 0.3% to $114.67 a barrel.

Nine of the S&P 500’s 11 sectors were down on Tuesday. Consumer-discretionary stocks were the best-performing sector, lifted by a 3.8% rise in the shares of online-commerce giant

Amazon.com.

U.S.-traded shares of

Unilever

surged 9.9% after the consumer-goods company said it would add activist investor Nelson Peltz to its board and disclosed his fund now holds a 1.5% stake.

The S&P 500’s energy sector is on track to finish May with the largest gain among the benchmark index’s 11 groups, extending a trend that has flourished for much of 2022. But even some beaten-down stocks are set to end the month in the green, such as

Netflix,

Robinhood Markets

and

Zoom Video Communications.

“When the S&P 500 is [close to entering] a bear market, that has a big psychological impact on those seeking value,” said

Craig Erlam,

senior market analyst at Oanda. “I think the question repeatedly being asked is, ‘Are we seeing a bottom in the markets?’”

In the bond market, the yield on 10-year Treasury notes rose to 2.842% from 2.748% Friday. Bond yields and prices move in opposite directions.

Bitcoin was trading at about $31,664, according to CoinDesk, rising 1.2% from its price at 5 p.m. ET on Monday.

Overseas, the pan-continental Stoxx Europe 600 fell 0.7%, snapping a four-session winning streak, after eurozone inflation rose faster than expected. Consumer prices rose 8.1% on the year in May—the fastest past since records began in 1997—after climbing at a 7.4% rate in April. The inflation report will likely factor into the European Central Bank’s coming interest-rate decisions. Earlier this month, ECB President

Christine Lagarde

indicated that the central bank could increase its key interest rate in July for the first time in 11 years.

Traders worked on the floor of the New York Stock Exchange on Friday.



Photo:

Courtney Crow/Zuma Press

In Asia, the Shanghai Composite Index rose 1.2% after the city’s government said a two-month lockdown would be lifted Wednesday. The shutdown, designed to limit Covid-19 transmission, had slowed the Chinese economy and added to inflationary pressures elsewhere in the world by gumming up supply chains.

Hong Kong’s Hang Seng rose 1.4%. Japan’s Nikkei 225 fell 0.3%.

Write to Caitlin McCabe at caitlin.mccabe@wsj.com, Joe Wallace at joe.wallace@wsj.com and Alexander Osipovich at alexander.osipovich@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Business

Robinhood Shares Fall Premarket After Bigger-Than-Expected Loss

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Robinhood Markets Inc.’s

HOOD -6.45%

stock fell 14% in premarket trading after the brokerage reported a loss of $423 million for the fourth quarter.

The company had an increase in technology and administrative expenses that ate into its results.

The brokerage used by individual investors recorded revenue of $363 million for the October-through-December period, an increase of 14%.

For the year, Robinhood recorded an 89% jump in revenue to $1.82 billion, up from $959 million the previous year. The company’s net loss totaled $3.7 billion for the year.

Robinhood’s results missed analyst expectations. Analysts polled by FactSet expected fourth-quarter revenue of $376 million and a net loss of $225 million.

The brokerage in 2021 experienced momentum in its options and cryptocurrency trading business, as individual investors dabbled in riskier and more speculative trading strategies. But in the fourth quarter, the company said, revenue tied to stock trading fell 35% to $52 million from $80 million.

In contrast, revenue tied to customers’ options trading rose 14% to $163 million.

Robinhood became a darling of the Covid-19 era, as millions of new investors began trying their hand at trading. The brokerage now has 22.7 million customers, it said Thursday, up from 12.5 million in 2020.

The company faces stiff competition. Asset managers such as Fidelity Investments and

BlackRock Inc.

have used their scale to increase profits even while cutting fees. They have also focused on adding products with higher fees.

Robinhood started the first half of 2021 in a strong position as millions of investors entered the market to trade meme stocks such as

GameStop Corp.

and cryptocurrencies such as dogecoin. Yet as the year went on, it was hard to keep the momentum. The company experienced a slowdown in revenue tied to customers’ trading. Revenue tied to cryptocurrency trading was particularly hard hit in the third quarter.

Shiba Inu Coin’s recent surge, and subsequent fall in value, is part of a growing trend of meme coins that are rivaling some of the largest digital tokens in the world. WSJ retail investing reporter Caitlin McCabe explains why investors are pouring money into this meme based cryptocurrency. Photo: Amber Bragdon/Getty Images

The new year hasn’t provided relief, with trading continuing to fall, the company said.

Robinhood lowered its revenue expectations for the first quarter to less than $340 million, which, at the top end would be a 35% decline.

Jason Warnick,

Robinhood’s chief financial officer, said in a call with the media that trading activity has picked up in recent days.

Mr. Warnick said the company is planning to roll out products that focus on longer-term investing. He said the company expects to begin introducing tax-advantaged retirement accounts midyear and that there is an opportunity to expand internationally—particularly in the cryptocurrency space.

The company started rolling out cryptocurrency wallets this month to some customers, he said. The move allows customers to move their crypto holdings in and out of the Robinhood app.

Shares sank in after-hours trading after finishing Thursday at $11.61, down 6.5% from Wednesday’s close. Robinhood’s stock has been punished lately as investors rotate out of growth companies that were popular last year. Based on Thursday’s close, Robinhood has lost 69% from its initial public offering price of $38 a share.

Write to Caitlin McCabe at caitlin.mccabe@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Appeared in the January 28, 2022, print edition as ‘Robinhood Posts Loss, Sending Stock Into Nose-Dive.’

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Business

SEC Chairman Says Banning Payment for Order Flow Is ‘On the Table’

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Gary Gensler, chairman of the U.S. Securities and Exchange Commission.


Melissa Lyttle/Bloomberg

Text size

A controversial practice that has brought in billions of dollars to brokers and high-frequency trading firms is in the crosshairs of the Securities and Exchange Commission, and could be eliminated entirely.

In an interview with Barron’s on Monday, SEC Chairman Gary Gensler said that a full ban of payment for order flow is “on the table.” Payment for order flow is a practice where brokers send trade orders to market makers that execute those trades in return for a portion of the profits. 

Gensler says the practice has “an inherent conflict of interest.” Market makers make a small spread on each trade, but that’s not all they get, he said.

“They get the data, they get the first look, they get to match off buyers and sellers out of that order flow,” he said. “That may not be the most efficient markets for the 2020s.”

He didn’t say whether the agency has found instances where the conflicts of interests resulted in harm to investors. SEC staff is reviewing the practice and could come out with proposals in the coming months.

Gensler has mentioned several times that the U.K., Australia, and Canada forbid payment for order flow. Asked if he raises those examples because a ban could also happen in the U.S., he replied: “I’m raising this because it’s on the table. This is very clear.”

It’s not the only thing the SEC is considering.

“Also on the table is how do we move more of this market to transparency,” he said. “Transparency benefits competition, and efficiency of markets. Transparency benefits investors.”

Payment for order is part of a larger issue with market structure that Gensler is trying to solve. He notes that about half of trading is in dark pools or is internalized by companies that keep those trades off exchanges. Even some of the trading that takes place on exchanges is opaque — and exchanges are paid through rebates that are similar to payment for order flow. Opaque markets where different investors have their trade orders processed differently have the potential for abuse.

“It provides an opportunity for the market maker to make more, and for ultimately the investing public to get a little less when they sell, or have to pay more when they buy,” he said. “I think it also affects companies raising money,” he added, because it could be a barrier to “fair, orderly and efficient markets.”

The changes to payment for order flow may take place as part of a larger reshuffling of how trades are processed and tracked.

There has been a boom in retail trading in the past two years, with millions of new investors signing on to brokerage apps to trade stocks, options, and cryptocurrencies for the first time. The boom has been driven in part by a change in the way that brokers make money on customer trading. Most brokers no longer charge for trades up front. They make money off trades by sending orders to market makers like high-frequency trading firms. The market maker executes the trade, and profits off the difference between the bid and asking prices, sending part of that profit back to the broker. 

For most brokers, the practice is a relatively small part of their business model — often less than 10% of revenue. But for

Robinhood Markets

(ticker: HOOD), which pioneered zero-commission trading, payment for order flow makes up about 80% of its revenue.

Shares of Robinhood were already trading lower on the day, but fell further after the Barron’s report. In late afternoon trading on Monday, the stock was down 8%, at $43.03.

The company has told investors in securities filings that the SEC’s focus on payment for order flow is a risk factor. But company executives have played down the possibility of it being banned. “Our view internally is that we don’t expect payment for order flow to be banned,” said CFO Jason Warnick on Robinhood’s latest earnings call. He added that “we do think because payment for order flow is such a small revenue stream — it’s about 2 to 2 and a half cents per $100 traded — that it’s not a terribly difficult revenue stream for us to replace.”

But the SEC has found that all those fractions of pennies add up. In fact, the agency settled allegations with Robinhood last year over how it negotiated payment for order flow, and its disclosures to customers. The agency said that Robinhood made deals from 2015 to 2018 with market makers that gave the company a much higher percentage of the spread, whereas other brokers generally gave more of the spread back to customers.

The SEC order said Robinhood had negotiated an 80/20 split, with the company receiving the 80% and investors receiving 20%, whereas other brokers tended to have a split closer to 20/80. And the regulator said that Robinhood’s trade execution was so bad for consumers that it more than outweighed the benefit they got from not having to pay a commission. To settle the allegations, Robinhood agreed to pay $65 million but neither admitted nor denied the findings. The company has also said it has changed its payment for order flow practices.

Proponents of payment for order flow say that it is a way for brokers to make money that doesn’t really hurt consumers, and allow apps to charge zero commissions. It is a major reason that more people than ever have started investing, Robinhood’s Warnick said.

“Never before has investing in this country been cheaper,” he said.

He also noted that other brokers had historically accepted payment for order flow on top of commissions, whereas Robinhood has never charged commissions.

Any change to the practice would clearly be contentious.

“We’ll be definitely defending our customers and making sure that we don’t put up barriers that have been taken down and kept people out,” Warnick said.

Write to Avi Salzman at avi.salzman@barrons.com

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Business

Robinhood Revenue Surges on Cryptocurrency Trades

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Revenue at Robinhood Markets Inc. more than doubled in the second quarter thanks to a torrent of customers trading cryptocurrency, but the company posted a big loss due to an emergency funding deal earlier this year.

The trading app recorded a loss of $502 million, or $2.16 per share, on revenue of $565 million in its first earnings report since its July initial public offering. In the second quarter of 2020, Robinhood generated a profit of $58 million on revenue of $244 million.

Nearly 14.2 million Robinhood users, or roughly 63% of the company’s customer base with funded accounts, traded digital assets in the second quarter. Robinhood earned $233 million in fees from routing customers’ cryptocurrency trades to high-speed trading firms, with dogecoin accounting for nearly two-thirds of the volume. That is up from just $5 million a year earlier.

That helped offset slowdowns in other parts of Robinhood’s business due in part to waning interest in meme stocks. For instance, fees Robinhood earned executing customers’ stock trades fell 27% to $52 million.

Despite decreased stock-trading activity, interest that Robinhood received on margin loans nearly tripled to $31 million. Around 700,000 users held about $5.4 billion in margin-loan balances at the end of June.

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Business

Robinhood Stock Sale Soured By Investor Confusion, Valuation Concern

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Robinhood Markets Inc.’s

HOOD 0.95%

bid to revolutionize IPOs has created losses for investors instead, after one of the year’s most highly anticipated listings fell flat.

In a regulatory filing in early July, the trading platform’s co-founders said they would open their initial public offering to customers on equal terms with institutional investors. They said they recognized it may be the first IPO many would participate in, and pledged to “never sacrifice the safety of our customers’ money.”

It now appears Robinhood’s commitment to “democratizing” the IPO process played a role in the offering’s big initial stumble Thursday. An innovative auction system sowed some confusion among investors, many already suspicious of the valuation of a business that has drawn scrutiny from regulators and criticism from customers, people involved in the process said.

The stock, initially priced at $38, the bottom of the target range, sits below that. It is a disappointing result at a time when IPOs are booming and investor appetite for new issues is robust.

Robinhood proudly tore up the traditional IPO playbook. It insisted a large chunk of its stock—in the end up to 25%—go to its individual-investor customers compared with the normal retail allocation of well under 10%. It said employees could sell a portion of their stock right away instead of being locked up for six months. And when it came to determining the price of its IPO, Robinhood decided to use a hybrid-auction process, which attempts to assign shares to investors based on what they are willing to pay, regardless of who they are.

Robinhood co-founder Baiju Bhatt, in gray suit, and CEO and co-founder Vladimir Tenev in the Wall Street area of New York City on Thursday.

The hybrid auction has worked in other IPOs in the past year. In typical listings, underwriters give their investor clients updates throughout the roadshow—the seven- to 10-day period in which a company pitches its stock. These updates typically include guidance on how much demand bankers are seeing for the shares and the rough price they ultimately expect to set.

In this case the company and lead underwriters

Goldman Sachs Group Inc.

and

JPMorgan Chase

& Co. gave few such updates, people familiar with the matter said. When some large investors called the other underwriters on the deal, some of those bankers pleaded ignorance.

The opaqueness of the process sowed suspicion among some investors who assumed the deal was going poorly and adjusted their orders accordingly, investors and bankers said.

Many had already expressed concern about how much of Robinhood’s revenue comes from a controversial practice called payment-for-order-flow, which the Securities and Exchange Commission is reviewing, people who attended the roadshow said. Others questioned what they saw as the high valuation the eight-year-old company was seeking—in excess of $30 billion.

Another concern: whether Robinhood’s controversial decision earlier this year to stop users from buying meme stocks like

GameStop Corp.

would prompt some to eschew the offering.

Wednesday night, as bankers met with Robinhood Chief Executive

Vlad Tenev

to set the price, some investors said they were only told it would be within the $38 to $42 target range. This surprised many large institutions, who are used to more guidance heading into a pricing meeting.

A Robinhood IPO event in Times Square.

An unusually large percentage of shares were set to be allocated to hedge funds, which are more likely to “flip” IPO stock on the first day of trading, according to people close to the deal. To bring in more of the biggest institutional funds who are viewed as “buy-and-hold” investors, Robinhood chose $38 a share instead of the higher price some funds were willing to pay.

The company and Goldman felt comfortable that the lower price was conservative enough that the shares would rise on their first day of trading, especially given the buzz around Robinhood in the lead-up to the listing, according to people close to the deal.

Instead, the stock opened at $38 a share, unusual at a time when big initial pops for hot IPOs are more the norm. It rose higher briefly, touching $40 before dropping through the IPO price. It closed down 8.4% Thursday before recovering slightly Friday.

The brokerage app Robinhood has transformed retail trading. WSJ explains its rise amid a series of legal investigations and regulatory challenges. Photo illustration: Jacob Reynolds/WSJ

Robinhood’s Stock Market Debut

Write to Corrie Driebusch at corrie.driebusch@wsj.com

Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Business

Bitcoin Fraud Concerns Draw Scrutiny From Regulators

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Regulators are signaling they want more control over an expanded cryptocurrency universe that has pushed further into Wall Street activities without the investor and consumer protections that apply to traditional securities and financial services.

The catch: no single regulator inspects crypto exchanges or brokers, unlike in the securities and derivatives markets. Regulators step in only when they believe U.S. law applies to a particular cryptocurrency or transaction, based on the way the asset was sold or traded.

Once a quirky asset that required navigating special exchanges to buy, cryptocurrencies can now be easily purchased on mobile apps from PayPal Holdings Inc., Square Inc.’s Cash app and Robinhood Markets Inc.

“A lot more money is being put into it, there is a lot of trading and the uses seem to be expanding,” said Dan Berkovitz, a commissioner on the Commodity Futures Trading Commission. “I see a concern about whether we have a shadow financial system developing, and that should be a question for all of the regulators.”

Securities and Exchange Commission Chairman Gary Gensler has told House lawmakers that investor protection rules should apply to crypto exchanges, similar to those that cover equities and derivatives. Regulated exchanges are required by law to have rules that prevent fraud and promote fairness. But crypto exchanges face no such standard, Mr. Gensler said at the Piper Sandler Global Exchange and FinTech conference last month.

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Business

GameStop Investors Who Bet Big—and Lost Big

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Salvador Vergara was so enthusiastic about

GameStop Corp.

GME 2.54%

in late January that he took out a $20,000 personal loan and used it to purchase shares. Then the buzzy stock plunged nearly 80%.

GameStop’s volatile ride is hitting the portfolios of individual investors like Mr. Vergara who purchased the stock in a social-media-fueled frenzy. These casual traders say GameStop was their “YOLO,” or “you only live once,” trade. They bought around its late January peak, betting it would continue its astronomical climb. While some cashed out before it crashed, others who hung onto their shares are in the red.

‘I thought it could go up to $1,000. I really believed in that hype, which was an awful thing to do,’ Mr. Vergara says.



Photo:

Farrah Skeiky for the Wall Street Journal

Mr. Vergara, a 25-year-old security guard in Virginia, started investing four years ago after deciding he wanted to retire young. To save money, he drives a 1998 Honda Civic, eats a lot of rice and lives with his dad. He stashed his savings mostly in diversified index funds, which are now valued at about $50,000. Then Mr. Vergara, a longtime reader of the WallStreetBets page on Reddit, saw others posting about buying GameStop shares and the stock’s colossal rise.

He didn’t want to touch his index-fund investments, so instead he got a personal loan with an 11.19% interest rate from a credit union and used it to fund most of his GameStop purchase. He bought shares at $234 each.

Price return, year to date, 30-minute intervals

Source: FactSet

GameStop shares started the year around $19, zoomed to nearly $350 (and almost hit $500 in intraday trading) in late January, and then began to spiral back to earth. The shares closed Friday at $52.40, down 85% from the peak close.

“I thought it could go up to $1,000. I really believed in that hype, which was an awful thing to do,” Mr. Vergara said.

He plans to hold on to the shares because he believes in the company’s turnaround, he said, and use his paycheck to cover the monthly payments on the personal loan. Once the pandemic is over, he hopes to move back to his native Philippines, live off savings and start a charity. The GameStop loss set those plans back about six months, he said.

One of the artworks by Tony Moy, whose bet on GameStop stock has lost much of its value, is inspired by ‘diamond hands,’ a phrase used to describe hanging onto your position, no matter what.



Photo:

Matt Moy

Free trading and simple-to-use apps have made it much easier for regular investors to pour money into stocks like GameStop. In a world without international travel, live entertainment and other usual pastimes, brokerage apps such as Robinhood Markets Inc. are drawing hordes of new users looking for both a diversion and a jackpot.

Before the pandemic, Patrick Wesolowski checked his portfolio once a week. Then the clients of his Chicago-area dog-walking business stopped taking vacations and started working from home, crimping his income and leaving him with lots of free time.

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With business sluggish, the 31-year-old started spending more time researching stocks to include in his $15,000 portfolio. He “lurked” on WallStreetBets, reading about other investors’ wild bets but not posting much himself. “It’s like reading ‘Florida Man’ news headlines with a Wall Street twist,” he said.

In recent months, Mr. Wesolowski found himself picking up his smartphone to check his Fidelity Investments brokerage-account balance more often. He followed the frenzy around GameStop, and when shares were approaching $300 decided to put in $3,000. Afterward, he checked his portfolio on his phone every 10 minutes. At first, watching the stock drop made him feel queasy, but then he got used to it.

“If I lose it, I lose it. I’m OK. It’s like going to Vegas,” Mr. Wesolowski said. If he still had that money, he said, he might have put it toward a personal splurge like a vacation.

Patrick Wesolowski spent more time researching stocks after the pandemic hurt his dog-walking business and bought $3,000 of GameStop shares.



Photo:

Ola Wazny

For many, GameStop represented more than just an investment. When Tony Moy bought about $1,200 of the shares, two at $379 and two more a few days later at $228, “I knew it was, intrinsically, the wrong move,” he said.

Mr. Moy wasn’t surprised when the stock quickly lost much of its value. A casual reader of WallStreetBets, he was mostly excited about the push to stick hedge funds with losses. Some hedge funds that shorted the stock—betting the price would fall—suffered big losses, though others managed to make money during the turmoil.

The trade was an outlet for Mr. Moy’s frustrations after an abysmal year, a “virtual protest” of sorts, he said. In 2020, after the pandemic shut down large gatherings, the Chicago-based artist lost most of his income from selling his work at comic conventions. He also came down with a bad case of Covid-19 that left him coughing for months. He said his more successful investing endeavors have helped him get by financially.

One of Mr. Moy’s most recent works of art is inspired by “diamond hands,” a phrase used on Reddit to describe hanging onto your position, no matter what. He is keeping his GameStop shares as a memento. “It’s going to be a little reminder to me,” he said, “of how 2020 was the year when hedge funds had a great year and everyone else was struggling.”

The recent run-up in GameStop and other stocks involved investors in opposing camps: traditional Wall Street firms and small investors bucking the system. WSJ asked the same questions to one of each about the role of WallStreetBets in the trading frenzy. Photo Illustration: Carlos Waters

Write to Rachel Louise Ensign at rachel.ensign@wsj.com

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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GameStop Day Traders Are Moving Into SPACs

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Special-purpose acquisition companies—shell companies planning to merge with private firms to take them public—are rising more than 6% on average on their first day of trading in 2021, up from last year’s figure of 1.6%, according to University of Florida finance professor

Jay Ritter.

Before 2020, trading in SPACs was muted when they made their debut on public markets.

Now, shares of blank-check companies almost always go up. The last 140 SPACs to go public have either logged gains or ended flat on their opening day of trading, per a Dow Jones Market Data analysis of trading in blank-check companies through Thursday. One hundred and seventeen in a row have risen in their first week. The gains tend to continue, on average generating bigger returns going out to a few months.

The gains in companies that don’t yet have any underlying business underscore the wave of speculation in today’s markets. Merging with a SPAC has become a popular way for startups in buzzy sectors to go public and take advantage of investor enthusiasm for futuristic themes.

But lately, day traders are even putting money into SPACs before they have revealed what company they are buying. At that stage, they are pools of cash, so investors are wagering that the company will eventually complete an attractive deal.

Despite the risks, many are embracing the trade, underscoring how online investing platforms and social-media groups now send individuals flocking to new corners of markets, including shares of unprofitable companies such as GameStop and

AMC Entertainment Holdings Inc.

AMC 53.65%

That trend also is playing out in everything from shares of silver miners to SPACs, which were relatively rare before last year but are suddenly ubiquitous in finance.

“I would just have a bad case of FOMO if I wasn’t in SPACs,” said

Marco Prieto,

a 23-year-old real-estate agent living in Tucson, Ariz., referring to the fear of missing out that is driving many individuals to put money into markets.

He has a roughly $50,000 portfolio and about 60% of his holdings tied to blank-check companies. Some of his positions are early on in shell firms such as

Social Capital Hedosophia Holdings Corp. VI,

while others are based on rumors tied to possible deals by companies including

Churchill Capital Corp. IV.

Share-price performance of existing SPACs without deals announced*

Amount of cash

held by SPAC:

Biotechnology/Life science/Health care

Share-price performance of existing SPACs without deals announced*

Amount of cash

held by SPAC:

Biotechnology/Life science/Health care

Share-price performance of existing SPACs without deals announced*

Amount of cash

held by SPAC:

Biotechnology/Life science/Health care

Share-price performance of existing SPACs without deals announced*

Amount of cash

held by SPAC:

Biotechnology/Life science/Health care

Shares of that company have more than doubled since Bloomberg News reported on Jan. 11 that it is in talks to combine with electric-car firm Lucid Motors Inc. Trading got so frenzied that the SPAC put out a statement a week later saying it wouldn’t comment on the report and that it is always evaluating a number of possible deals. The stock has still been gyrating in the days since.

Investors betting on SPACs even before such reports is extraordinary because the underlying value of a blank-check firm before it pursues a deal is the amount of money it raises for a public listing. That figure is typically pegged at $10 a share. Still, it has become common for investors to buy at higher prices such as $11 or $12 to back big-name SPAC founders such as venture capitalist

Chamath Palihapitiya

and former Citigroup Inc. deal maker

Michael Klein.

In another sign blank-check firms are now frequently traded by individuals, several SPACs and companies that have merged with them recently joined GameStop and AMC on a list of stocks that had position limits on Robinhood Markets Inc., a popular brokerage for day traders. Those restricted included Mr. Klein’s Churchill Capital IV and a few of Mr. Palihapitiya’s SPACs in the

Social Capital Hedosophia

SPCE 2.74%

franchise.

The flood of money pouring in is a concern for skeptics who worry that everyday investors don’t understand the dangers of the trade. Even recent losses in a few hot companies such as electric-truck startup

Nikola Corp.

NKLA -0.39%

and health-care firm MultiPlan Inc. that merged with blank-check firms aren’t deterring investors because of the gains in other SPACs.

“It’s a tremendous amount of speculation,” said

Matt Simpson,

managing partner at Wealthspring Capital and a SPAC investor. His firm invests when SPACs go public or right after, then takes advantage when shares rise and typically sells before a deal is completed. He advertised an expected return from the strategy of 6% to clients, but last year it returned 20%.

Ninety-one SPACs have raised $25 billion so far this year, putting the market on track to shatter last year’s record of more than $80 billion, according to data provider SPAC Research.

Fast gains in the shares can result in big payoffs for their founders and the first investors in blank-check firms like Mr. Simpson. These earliest investors always have the right to withdraw their money before a deal goes through. The traders who get in later don’t have those same privileges, but that hasn’t been a deterring factor.

“If you don’t take a risk, there’s really no opportunity at all,” said

Chris Copeland,

a 36-year-old in upstate New York who started day trading on the platform Robinhood with his girlfriend last month. Roughly three-quarters of his portfolio is tied to SPACs such as

GS Acquisition Holdings Corp. II.

Mr. Prieto checks SPACs on his phone. ‘I would just have a bad case of FOMO if I wasn’t in SPACs,’ he says.



Photo:

Cassidy Araiza for The Wall Street Journal

Trading volumes in many popular blank-check firms have increased lately, an indication of investors’ heightened activity. That trend is even drawing attention from some SPAC founders.

“It worries me,” said veteran investor and SPAC creator

Bill Foley.

Trading volumes have surged in one of the SPACs founded by the owner of the Vegas Golden Knights hockey team, especially since it announced a $7.3 billion deal to take

Blackstone Group Inc.

BX 0.21%

-backed benefits provider Alight Solutions public last week.

One reason traders are getting into blank-check firms when they are just pools of cash is that the time it takes for a SPAC to unveil a deal has dwindled. Blank-check firms normally give themselves two years to acquire a private company, but many these days need only a few months.

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It also doesn’t take long for investor speculation about a blank-check firm’s acquisition to build, particularly because SPACs can indicate the sector in which they hope to complete a deal.

Excitement can be triggered by a SPAC pioneer like Mr. Palihapitiya, who sometimes hints to his more than 1.2 million Twitter followers when activity is coming. The former Facebook Inc. executive took space-tourism firm

Virgin Galactic Holdings Inc.

public in 2019 and last month reached a deal with Social Finance Inc.

Even though he invests in a number of blank-check firms other than his own—often when SPACs need to raise more money to complete deals—shares of his own companies can climb following such tweets. One example came Jan. 21, when one of his blank-check firms rose about 4% after Mr. Palihapitiya started a tweet by saying “I’m finalizing an investment in ‘???.’”

The SPAC has since given back those gains after no news about an acquisition came out and it was revealed that Mr. Palihapitiya’s investments were in companies unrelated to his own. He declined to comment.

Mr. Palihapitiya also has thrown himself into the frenzy of activity around GameStop trading, publicizing an options trade last week in the stock and taking profits on it.

Reports about possible mergers like those surrounding the Churchill Capital IV SPAC and a possible combination with Lucid Motors also quickly attract hordes of buyers. That blank-check firm is now owned by many individuals, including Messrs. Prieto, Copeland and

Jack Oundjian,

a 40-year-old who lives in Montreal.

“I’m very excited that we have a chance to be able to participate in what could be future unicorn companies,” or startups valued at $1 billion or more, Mr. Oundjian said. He said he views SPACs as long-term investments rather than fast trades, and holdings tied to the sector make up about 30% of his roughly $1.2 million portfolio.

Private companies are flooding to special-purpose acquisition companies, or SPACs, to bypass the traditional IPO process and gain a public listing. WSJ explains why some critics say investing in these so-called blank-check companies isn’t worth the risk. Illustration: Zoë Soriano/WSJ

Write to Amrith Ramkumar at amrith.ramkumar@wsj.com

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8



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