Monday was a strenuous day for Robinhood (NASDAQ: HOOD). Not only did reports surface that payments giant PayPal is looking to get into the stock trading business, but it also appears that SEC Chair Gary Gensler is mulling a potential ban of payment for order flow — one of Robinhood’s main sources of revenue.
Shares of Robinhood were sent plummeting before session close on Monday, after Barron’s published an interview with Gary Gensler, where the SEC Chair revealed that banning payment for order flow is back “on the table.” According to Gensler, PFOF— which allows discount brokerages such as Robinhood to charge zero commission for its services by sending trade orders to market makers such as Citadel in exchange for a portion of the profits— poses “an inherent conflict of interest.”
PFOF is one of Robinhood’s main sources of revenue, and allows the trading app to bypass commission fees from its users. However, the practice has been on the receiving end of significant criticism, particularly because it hinders markets from reaching full transparency. Market makers “get the data, they get the first look, they get to match off buyers and sellers out of that order flow,” explained Gensler. “That may not be the most efficient markets for the 2020s.”
Although Gensler stopped short of providing specific examples of where such conflict of interest has resulted in harm to investors, he said that SEC staff are currently in the midst of assessing the practice, and will likely come up with new proposals in the coming months.
Information for this briefing was found via Barron’s. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.