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Robinhood: playing for keeps | Financial Times



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.

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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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Pimco’s Ivascyn warns of inflationary pressure from rising rents




US Inflation updates

A leading US bond manager has warned of inflationary pressure from housing rental costs that could push interest rates higher and overturn a sense of complacency among investors.

The comments by Dan Ivascyn, chief investment officer at Pimco, which has $2.2tn under management, comes after US 10-year interest rates eased in recent months to about 1.25 per cent. Fears of an inflation surge sparked alarm among bond investors at the start of the year and pushed the important benchmark to a peak of 1.75 per cent by the end of March.

“There is a lot of uncertainty on inflation and while our base case is that it proves transitory, we are watching the relationship between home prices and rents,” Ivascyn told the Financial Times. “There may be more sustained inflation pressure from the rental side.”

Owners’ equivalent rent is a key input used for calculating the US consumer price index. As rents become more expensive, investors could become increasingly concerned about “sticky inflation”, pushing the 10-year Treasury yield back towards 1.75 per cent, said Ivascyn. 

Line chart of US 10-year expected rate of inflation showing long-term bond market inflation expectations loiter near decade peaks

The Federal Reserve said in its latest policy statement last week that it had made “progress” towards its goals of full employment and 2 per cent average inflation. Jay Powell, the Fed’s chair, said there was more “upside risk” to the inflation outlook, although he expressed confidence in transitory price pressure over time.

The latest measure of core consumer prices, which is followed by the central bank, ran at 3.5 per cent over the 12 months to June, the fastest pace since July 1991.

“There is a lot of noise and uncertainty in the data” and “the Fed has a difficult job deciphering the economic information coming in”, said Ivascyn.

The fund manager said the potential for much higher bond yields is probably capped by the prospect of the central bank tightening policy in the event of inflation expectations breaking higher.

Bar chart of assets under management ($bn) showing Pimco Income ranks as the largest actively managed bond fund

“We do believe if the Fed sees inflation expectations rise out of their comfort zone, that they will probably act,” said Ivascyn. “That has been the message from Powell’s last two press conferences.”

Pimco expects the central bank will announce a tapering of its current $120bn monthly bond purchases later this year, with a view to starting the process in January. While the policy shift is being “well telegraphed” and data dependent, Ivascyn said higher bond yields and more market volatility were likely.

“This is a tough market environment and it is a time when you want to be careful,” he said, adding that Pimco had been reducing its exposure to interest rate risk as the bond market had pulled borrowing costs lower. 

“Valuations are stretched and it makes sense to adjust our portfolios.”

Ivascyn oversees the world’s largest actively managed bond fund, according to Morningstar. The $140bn Pimco Income Fund co-managed with Alfred Murata, has a total return of 2 per cent this year, versus a slight decline in the Bloomberg Barclays US Aggregate index. Over the past year, the fund has extended its long record of beating its benchmark, according to Morningstar.

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Wall Street stocks follow European and Asian bourses lower




Equities updates

Wall Street stocks followed European and Asian bourses lower on Friday after markets were buffeted this week by jitters over slowing global growth and Beijing’s regulatory crackdown on tech businesses.

The S&P 500 closed down 0.5 per cent, although the blue-chip index still notched its sixth consecutive month of gains, boosted by strong corporate earnings and record-low interest rates.

The tech-focused Nasdaq Composite slid 0.7 per cent, after the quarterly results of online bellwether Amazon missed analysts’ forecasts. The tech conglomerate’s stock finished the day 7.6 per cent lower, its biggest one-day drop since May 2020.

According to Scott Ruesterholz, portfolio manager at Insight Investment, companies which saw significant growth during the pandemic may see shifts in revenue as consumers move away from online to in-person services.

“[Consumers are] going to start spending more on services, and so those businesses and industries which have benefited in the last year, companies like Amazon, will be talking about decelerating sales growth for several quarters,” Ruesterholz said.

The sell-off on Wall Street comes after the continent-wide Stoxx Europe 600 index ended the session 0.5 per cent lower, having hit a high a day earlier, lifted by a bumper crop of upbeat earnings results.

For the second quarter, companies on the Stoxx 600 have reported earnings per share growth of 159 per cent year on year, according to Citigroup. Those on the S&P 500 have increased profits by 97 per cent.

But “this is likely the top”, said Arun Sai, senior multi-asset strategist at Pictet, referring to the pace of earnings increases after economic activity rebounded from the pandemic-triggered contractions last year. Financial markets, he said, “have formed a narrative of peak economic growth and peak momentum”.

Column chart of S&P 500 index, monthly % change showing Wall Street stocks rise for six consecutive months

Data released on Thursday showed the US economy grew at a weaker than expected annualised rate of 6.5 per cent in the three months to June, as labour shortages and supply chain disruptions caused by coronavirus persisted.

Meanwhile, China’s regulatory assault on large tech businesses has sparked fears of a broader crackdown on privately owned companies.

“It underlines the leadership’s ambivalence towards markets,” said Julian Evans-Pritchard of Capital Economics. “We think this will take a toll on economic growth over the medium term.”

Hong Kong’s Hang Seng index closed 1.4 per cent down on Friday, while mainland China’s CSI 300 dropped 0.8 per cent, after precipitous slides earlier in the week moderated.

Japan’s Topix closed 1.4 per cent lower, after the daily tally of Covid cases in Tokyo surpassed 3,000 for three consecutive days. South Korea’s Kospi 200 dropped 1.2 per cent.

The more cautious investor mood on Friday spurred a modest rally in safe haven assets such as US government debt, which took the yield on the 10-year Treasury, which moves inversely to its price, down 0.04 percentage points to 1.23 per cent.

The Federal Reserve, which has bought about $120bn of bonds each month throughout the pandemic to pin down borrowing costs for households and businesses, said this week that the economy was making “progress” but it remained too early to tighten monetary policy.

“Tapering [of the bond purchases] could be delayed, which in many ways is not bad news for the market,” said Anthony Collard, head of investments for the UK and Ireland at JPMorgan Private Bank.

The dollar, also considered a haven in times of stress, climbed 0.3 per cent against a basket of leading currencies.

Brent crude, the global oil benchmark, rose 0.4 per cent to $76.33 a barrel.

Unhedged — Markets, finance and strong opinion

Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday

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US regulators launch crackdown on Chinese listings




US financial regulation updates

China-based companies will have to disclose more about their structure and contacts with the Chinese government before listing in the US, the Securities and Exchange Commission said on Friday.

Gary Gensler, the chair of the US corporate and markets regulator, has asked staff to ensure greater transparency from Chinese companies following the controversy surrounding the public offering by the Chinese ride-hailing group Didi Chuxing.

“I have asked staff to seek certain disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective,” Gensler said in a statement.

He added: “I believe these changes will enhance the overall quality of disclosure in registration statements of offshore issuers that have affiliations with China-based operating companies.”

The SEC’s new rules were triggered by Beijing’s announcement earlier this month that it would tighten restrictions on overseas listings, including stricter rules on what happens to the data held by those companies.

The Chinese internet regulator specifically accused Didi, which had raised $4bn with a New York flotation just days earlier, of violating personal data laws, and ordered for its app to be removed from the Chinese app store.

Beijing’s crackdown spooked US investors, sending the company’s shares tumbling almost 50 per cent in recent weeks. They have rallied slightly in the past week, however, jumping 15 per cent in the past two days based on reports that the company is considering going private again just weeks after listing.

The controversy has prompted questions over whether Didi had told investors enough either about the regulatory risks it faced in China, and specifically about its frequent contacts with Chinese regulators in the run-up to the New York offering.

Several US law firms have now filed class action lawsuits against the company on behalf of shareholders, while two members of the Senate banking committee have called for the SEC to investigate the company.

The SEC has not said whether it is undertaking an investigation or intends to do so. However, its new rules unveiled on Friday would require companies to be clearer about the way in which their offerings are structured. Many China-based companies, including Didi, avoid Chinese restrictions on foreign listings by selling their shares via an offshore shell company.

Gensler said on Friday such companies should clearly distinguish what the shell company does from what the China-based operating company does, as well as the exact financial relationship between the two.

“I worry that average investors may not realise that they hold stock in a shell company rather than a China-based operating company,” he said.

He added that companies should say whether they had received or were denied permission from Chinese authorities to list in the US, including whether any initial approval had then be rescinded.

And they will also have to spell out that they could be delisted if they do not allow the US Public Companies Accounting Oversight Board to inspect their accountants three years after listing.

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