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Odd couple: two-year-old New York startup merges with 86-year-old Idaho brokerage

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Here’s an odd match: Roboinvest, a two-year-old New York startup, has merged with Pennaluna & Company, an Idaho brokerage founded in 1926 that specializes in mining stocks. The merger lets Roboinvest skip the agonizing process of registering as a broker-dealer in order to conduct trading, and gives the aging Pennaluna hope for new growth.

Roboinvest is one of the pioneers of "social investing," in which traders broadcast their trades for others to copy, the rationale being that most small-time investors prefer to follow an exprienced guru. It’s similar to other "mirrored investing" or "copycat trading" platforms such as Covestor, eToro, and Currensee.

Roboinvest works with platforms like E*TRADE that are registered with the Financial Industry Regulatory Agency (FINRA), but it’s not legally allowed to facilitate trades itself. That’s where Pennaluna comes in.

The only registered broker-dealer in Idaho, the 16-person firm was founded in silver mining country and specializes in mining and Canadian stocks. The firm executes "thousands" of trades a year, Pennaluna president Ron Nicklas said.

Roboinvest’s founder Michael Giles, a hobby trader from Australia, approached the brokerage six months ago seeking a partnership. Pennaluna operates an online trading platform called PennTrade, launched in 1999. Roboinvest will be run as its "sister site," and Pennaluna will advertise the new product to its clients.

"In a changing world, we do know our capacity."

Roboinvest is still developing its business model, which Giles has said will involve charging fees for driving business to brokerages. The terms of the deal were not disclosed, but no money changed hands and the transaction was all in stock. Roboinvest recently raised $240,000 from investors and the merger seems to be an even partnership for both sides. Giles will join Pennaluna’s board and continue to run Roboinvest.

"It's an unusual fit, but it's a natural fit," Niklas said.

Trading volumes have dried up across the board in the past few years due to the recession, he said, and small brokerages are feeling squeezed. "In a changing world, we do know our capacity," he said. Upstart trading platforms like Roboinvest may not be the future, he said, but "I think they're worth a shot."

There are just 5,100 registered broker-dealers in the US, according to the SEC. Getting the license to trade was the primary motivation behind the merger, Giles said in an email. "It’s the fastest way to become a registered broker-dealer with existing technology and client base," he said. "The greatest challenge for an online brokerage is acquiring customers. This transaction buys us two years of development in terms of product, team and customers."

The number of registered broker-dealers has been on the decline, and smaller firms are finding it especially hard to manage. This makes for a potential symbiosis between young, ambitious startups and traditional brokerages, creating a rare case when the "disruptors" need something from the established players. Don’t be surprised if more of these odd couple pairings get announced in the near future.

The Verge
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