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Robinhood: playing for keeps | Financial Times

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One think piece to start: London has struggled to compete with bustling equity markets in the US and China. The FT’s Daniel Thomas chronicles the UK’s quest to regain its IPO mojo here.

Welcome to the Due Diligence briefing from the Financial Times. Not a subscriber? Sign up here. Drop us a line and join the conversation: Due.Diligence@ft.com

Robinhood: game theory

Robinhood, the trading app named after the legendary outlaw who steals from the rich to give to the poor, is increasingly having a hard time living up to the reputation of its namesake.

The Robinhood application displayed in the Apple App Store © Bloomberg

The Menlo Park-based group, which has seen its popularity skyrocket during the pandemic as retail investors flocked to its millennial-friendly platform, was founded with a mission to help provide everyone with access to the financial markets. Its message has resonated with investors who have valued the company at more than $11bn. 

But Robinhood has found itself in hot water with regulators. On Thursday, the company agreed to pay $65m to settle charges from US securities regulators that it failed to provide its customers with the best prices for trades on its platform. 

News of the settlement came just one day after the Massachusetts Securities Division launched legal action against Robinhood, accusing it of “gamifying” investing. For anyone who hasn’t used the app, confetti rains down after a customer makes a trade and there are often prompts to go into more complex trading products such as options and derivatives.

According to the Securities and Exchange Commission, before 2018, Robinhood didn’t disclose on its website about how it was making money from deals with high-speed trading groups such as Citadel Securities and Two Sigma Securities (the trading platform named them as market makers in a disclosure to the SEC) — not quite the band of merry men some would expect. 

The two groups were not named by the SEC in its complaint against Robinhood and haven’t been accused of any wrongdoing. 

The practice is something called payment for order flow. It sounds complex but Robinhood is essentially paid by high-speed traders to route its customers’ orders through them, allowing them to execute the trades.

Robinhood co-founders and co-chief executives Baiju Bhatt (above) and Vlad Tenev (below) © Bloomberg
© Bloomberg

Here’s the deal: this process is used by all large retail brokers. The legend goes that Bernard Madoff — yes, the guy who, separately, ran a huge Ponzi scheme — pioneered the practice. The difference is that retail brokers have to disclose it. 

According to the SEC, Robinhood didn’t make that clear. The regulator said the company had “wilfully” violated the Securities Act by misleading customers on how it makes money.

In a statement, Robinhood said the practices under scrutiny in the settlement “do not reflect Robinhood today”.

The SEC said Robinhood had deprived customers of $34.1m because of payments from high-speed trading houses that influenced its decisions over how trades were executed. Its users would’ve been better off placing orders with other brokers, according to the Wall Street watchdog. 

The question people will want to ponder is, “who’s really making out like bandits here?”

Out of sight, out of mind: MindGeek and the new pornographers

A shadow industry of adult content has risen from the depths of the internet to take on Silicon Valley’s most powerful data-crunchers. 

But unlike the internationally revered (or reviled) leaders of big tech behemoths, you won’t find the top executives of online pornography offering takes on cable news or sitting next to Mark Zuckerberg and Jeff Bezos at an antitrust hearing.

In fact, until this investigation by the FT’s Patricia Nilsson, the identity of the world’s most successful porn magnate was a mystery.

MindGeek’s headquarters in Montreal © Kristoffer Tripplar/Alamy

MindGeek, the secretive owner of highly trafficked sites including PornHub and RedTube, is primarily owned by a businessman called Bernard Bergemar, a fact previously known perhaps only by a small circle of MindGeek executives and their advisers.

Like its top ranks, the company’s early lenders are also eager to keep out of the limelight.

The web of porn providers that would eventually become MindGeek was pieced together by the German businessman Fabian Thylmann, who in the late 1990s developed one of the first pieces of software allowing website owners to charge for advertisements. A new era had begun.

Fast-forward to 2011, when Thylmann secured $362m in debt from 125 secret investors that — according to one financial backer — included Fortress Investment Group, JPMorgan Chase and Cornell University.

The California-based investment adviser Glendon Capital was also said by a former investor to be one of its biggest backers, but a person close to the group said it had sold its position.

All three companies declined to comment, while the university said that its investment managers’ portfolios were confidential.

Whichever investors helped out MindGeek along the way, their investments have certainly paid off.

Thylmann would be charged with tax evasion in late 2012 and sell the company to senior managers Feras Antoon and David Tassillo, but the Montreal-headquartered, Luxembourg-listed group went on to pull in just over $460m in revenues in 2018, and draws more than 115m visitors to its websites every day.

Unfortunately, the sheer reputational concerns of being affiliated with porn are not the only reason industry heads and investors may be playing coy.

A banner at an International Women’s Day march in Toulouse carries the message ‘I’m more than a keyword on YouPorn’. © Alain Pitton/NurPhoto/Getty

Each day about 15 terabytes of videos are uploaded to MindGeek’s free-to-watch sites, roughly half the amount available on Netflix. Much of that content, uploaded by others, has been stolen or appears poorly regulated by both governments and the porn companies themselves, inviting issues from piracy to exploitation of children and sex trafficking to revenge porn.

Wall Street and China: star-crossed profits

A trade war is still simmering and a fight over finance is gaining steam. But Wall Street hasn’t seemed to notice.

Big tech debuts like that of JD Health’s $3.5bn Hong Kong listing and the online lender Lufax’s $2.4bn New York IPO have fuelled the record $132.3bn Chinese companies raised this year, or 38 per cent of all global equity fundraising in 2020.

Column chart of Funds raised from primary and secondary share offers ($bn) showing China equity fundraising climbs to record high in 2020

Investment bankers outside China raked in $1.73bn from selling shares in Chinese groups, with US banks accounting for four of the top five global earners on those deals, led by Goldman Sachs and Morgan Stanley — which reaped $382m and $346m in equity fees from the listings respectively. Bank of America’s fees from China deals jumped more than 300 per cent to $197m this year, with the bank blowing past JPMorgan and Credit Suisse to take third place.

Bar chart of Revenues from China equity capital markets deals ($m) showing Goldman Sachs and Morgan Stanley top earners in China equities trade

Of course, there was one notable gap in the windfall. Beijing regulators’ decision to halt Ant Group’s hulking $37bn IPO may have helped tip the scale in topping banks’ $1.77bn fee record earned from Chinese groups in 2010.

Job moves

  • Rio Tinto has named its finance director Jakob Stausholm as its next chief executive. He will replace Jean-Sébastien Jacques, who stepped down following an international outcry over the destruction of a sacred Aboriginal site. More here.

Smart reads

The French Fox News Speculation is brewing that the battle between luxury tycoon Bernard Arnault and billionaire businessman Vincent Bolloré for media group Lagardère is getting political. French president Emmanuel Macron has taken notice. (Reuters)

Spacs in space Evangelist of the blank-cheque boom Chamath Palihapitiya has sold $98m worth of stock in his intergalactic Spac venture with Richard Branson. According to him, it was to manage his liquidity. But an aborted space flight test by the start-up last weekend has raised questions. (FT Alphaville)

Golden oldies A growing musical taste for “the old stuff” has pivoted the future of the streaming wars directly into the past, writes Spotify’s former economist Will Page, as yesteryear’s hits find new life, and the ever-evolving music industry rushes to monetise nostalgia. (FT)

Taking the cake Investment groups and hedge funds are increasingly churning out bankruptcy loans to take control of ailing corporations so quickly that lower-ranking creditors often miss the memo. (Bloomberg)

News round-up

Blackstone in talks with private jet group Signature Aviation over £3bn deal (FT)

Coinbase files for US listing in a first for a cryptocurrency exchange (FT + Lex + Alphaville)

Switzerland charges Credit Suisse in money laundering case (FT)

John Gutfreund’s decor, once a symbol of excess, could fetch $7 million (BBG)

Toscafund to take TalkTalk private in £1.1bn deal (FT)

Toshiba’s largest investor escalates clash with management (FT)

UAE-Israeli partnership agrees deal to buy Finablr (FT) 

Future of the City: London’s markets rivalry with EU intensifies (FT)

Former German defence minister defends his Wirecard lobbying (FT)

Newcastle United casts futile vote against Premier League $500m Middle East TV deal (FT)



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Oil price jumps above $70 after attacks aimed at Saudi oil facilities

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Oil prices jumped above $70 a barrel for the first time in 14 months after Saudi Arabia, the world’s top oil exporter, said its energy facilities had been attacked on Sunday, targeting “the security and stability” of global supplies.

A drone attack from the sea on a petroleum storage tank at Ras Tanura, one of the largest oil shipping ports in the world, took place on Sunday morning, the kingdom said.

In the evening, shrapnel from a ballistic missile fell in Dhahran, where state oil company Saudi Aramco has its headquarters and near where thousands of employees and their families live.

While Saudi Arabia’s ministry of energy said the attacks “did not result in any injury or loss of life or property”, and a person familiar with the matter said no production had been affected, the attacks have still unsettled oil markets that have rebounded strongly in recent months.

Brent crude, the international benchmark, rose 2 per cent to a high of $71.16 a barrel while West Texas Intermediate, the US benchmark, rose by a similar amount to a high of $67.86 a barrel.

Yemen’s Iran-allied Houthi fighters claimed responsibility for the attacks and said they had also focused on military targets in the Saudi cities of Dammam, Asir and Jazan.

A Houthi military spokesperson said the group had fired 14 bomb-laden drones and eight ballistic missiles in a “wide operation in the heart of Saudi Arabia”.

Amrita Sen at Energy Aspects emphasised that while a direct hit on oil supplies appeared to have been avoided, the threat to the market would still be taken seriously by oil traders.

“The oil price was already on a strong footing after Saudi Arabia and Opec’s decision last week to keep restricting production,” she said.

Brent crude, the international oil benchmark, has risen close to $70 a barrel since the cartel and allies outside the group, including Russia, decided not to unleash a flood of crude on to the market.

Amid uncertainty about the oil market outlook as the coronavirus crisis continues to have an impact on crude demand, the group decided against raising production by 1.5m barrels a day from April.

Given the supply curbs, while the kingdom has the extra production capacity to tap into, “geopolitical threats to supply will add a premium to the price”, Sen added.

The kingdom’s state media outlet said earlier in the day that the Saudi-led military coalition confronting the Houthis had intercepted missiles and drones aimed at “civilian targets” without indicating their location.

The Eastern Province, where Dhahran is located, is where much of Saudi Aramco’s oil facilities are located. The attack is the most severe since September 2019.

At that time the kingdom was rocked by missile and drone fire that hit an important processing facility and two oilfields, temporarily shutting off more than half of the country’s crude output.

The Houthis have ramped up assaults on Saudi Arabia through airborne attacks and explosive-laden boats and mines in the Red Sea, laying bare the vulnerability of the country’s energy infrastructure despite the kingdom’s production prowess and its hold over the oil market.

“The frequency of these attacks is rising, even if the impact on energy infrastructure appears limited,” said Bill Farren-Price, a director at research company Enverus. “We know the capacity to cause serious damage exists, so this will boost the risk premium for oil.”



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Rio Tinto set to start negotiations over Mongolian mine

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Rio Tinto is set to start face-to-face negotiations with the government of Mongolia as its seeks to complete the $6.75bn expansion of a huge copper project in the Gobi desert. 

The Anglo-Australian group is sending a team of senior executives to the capital Ulaanbaatar to try and hammer out a new financing agreement so that the development timeline can be maintained and underground caving operations can start later this year.

The discussions will focus on a number of issues including tax, a new power agreement and benefit sharing, according to people with knowledge of the situation.

Some government officials want Rio to pay more than $300m of withholding taxes on income it has received from Oyu Tolgoi LLC, the Mongolian holding company that owns the mine. 

Rio receives a management service fee for running Oyu Tolgoi’s existing open pit and the underground project as well as interest on money it has lent the government to fund its share of the development costs.

However, the officials say it is “very difficult, if not impossible” to engage constructively on the issue because the payments are the subject of arbitration in London.

For its part, Rio believes the issue of withholding taxes is dealt with in the separate investment and shareholder agreements that cover its operations in the country.

The underground expansion of Oyu Tolgoi ranks as Rio’s most important growth project. At peak production it will be one of the world’s biggest copper mines, producing almost 500,000 tonnes a year.

Although Rio runs the existing operations and is in charge of the underground expansion project it does not have a direct stake in the mine.

It’s exposure comes through a 51 per cent stake in Turquoise Hill Resources, a Toronto-listed company. TRQ in turns owns 66 per cent of Oyu Tolgoi LLC, with the rest controlled by the government of Mongolia. 

The project has been beset by difficulties and is already two years late and $1.5bn over budget. The government said earlier this year that if the expansion is not economically beneficial to the country it would be necessary to “review and evaluate” whether it can proceed.

To that end the ruling Mongolian People’s party and its new prime minister Luvsannamsrain Oyun-Erdene are trying to replace the Underground Development Plan with an improved agreement.

Signed in 2015, this sets out the fees that Rio receives for managing the project as well as the interest rates on the cash Mongolia has borrowed to finance its share of construction costs.

However, it was never approved by Mongolia’s parliament and has become a focal point for critics who say the country should receive a greater share of the financial benefits.

Rio, which recently appointed a new chief executive, has told the government it is prepared to “explore” a reduction of its project management fees and loan interest rates as well as discuss tax.

However, analysts are sceptical that the two sides will be able to put a new agreement in place by June when a decision on whether to start caving operations must be taken if Oyu Tolgoi is to meet a new target for first production in October 2022.

Rio is also at loggerheads with TRQ on how to fund the cost overruns at Oyu Tolgoi. Last week, TRQ’s chief executive resigned after Rio said it planned to vote against his re-election at its annual shareholders’ meeting.

In a statement, Rio said it was committed to working with TRQ and the government of Mongolia to enable the successful delivery of the Oyu Tolgoi Project

“Aligning and co-ordinating our joint efforts to resolve the concerns of the Government . . . going forward is of the highest priority,” it said.



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Value investor John Rogers sees an end to Big Tech’s stock market dominance

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The veteran value investor John Rogers predicted the US is headed for a repeat of the “roaring twenties” a century ago that will finally encourage investors to dump tech stocks in favour of companies more sensitive to the economy.

The founder of Ariel Investments told the Financial Times in an interview that value investing “dinosaurs” like him stood to win as higher economic growth and rising interest rates took the air out of some of the hottest stocks of recent years.

Rogers, who has spent a near four-decade career focused on buying under-appreciated stocks, said the frenzied buying of special purpose acquisition companies, or Spacs, signalled frothiness in parts of the market, even while a coming economic boom underpinned other share prices.

“This will be a sustainable recovery. I think there’s going to be kind of a roaring twenties again,” Rogers said, adding that the strength of the economic recovery would surprise people and challenge the Federal Reserve’s ultra-dovish monetary policy.

The US central bank is “overly optimistic that they can keep inflation under control”, he said, and higher bond market interest rates would reduce the value of future earnings for highly popular growth stocks such as tech companies and for the kinds of speculative companies coming to market in initial public offerings or via deals with Spacs.

“Spacs are a sign that growth stocks are topping. A signal that the market is frothy,” said Rogers, a self-styled contrarian and famed for his Patient Investor newsletter for clients that debuted in 1983.

Value investing is based on identifying cheap companies that are trading below their true worth, an approach long espoused by Warren Buffett. Value stocks and those sensitive to the economic cycle boomed after the internet bubble burst in 2000, but the investment strategy has been well beaten over the past decade by fast-growing stocks, led by US tech giants. 

“We’ve been looking like the dinosaurs for so long,” said Rogers. “We’ve been waiting for that booming economic recovery since 2009.”

Proponents of value investing believe that the combination of expensive growth stock valuations and a robust recovery from the pandemic will cause a significant switch between the two investing approaches.

Higher bond market interest rates reduce the relative appeal of owning growth stocks based on their future earnings power.

When 10-year bond yields rise, “growth stocks look way, way too expensive versus value,” said Rogers. “Value stocks are going to come out of the recovery very strong, they’re going to have a tailwind from an earnings perspective. Their earnings are going to be here and now, not 20, 30 years down the road.”

The Russell 1000 Value index outperformed the equivalent growth index by 6 percentage points in February, rising 5.8 per cent versus a drop of 0.1 per cent for the growth index. That was the biggest outperformance for value since March 2001, according to analysts at Bank of America.

“Although rising rates triggered the rotation, we see a host of other reasons to prefer value over growth,” the analysts wrote last week, “including the profit cycle, valuation, and positioning that can drive further outperformance.”

Rogers said he expected higher overall stock market volatility from rising interest rates this year but value should reward investors as it did “20 years ago once the internet bubble burst”. Ariel is bullish on “fee generating financials” and Rogers said preferred names included KKR, Lazard and Janus Henderson, while it was also bullish on traditional media, including CBS Viacom and Nielsen.

Chicago-based Ariel is one of the few large black-owned investment companies in the US, with $15bn of assets under management. It manages the oldest US mid-cap value fund, dating from 1986. 



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