SEC considering ban of Robinhood’s (HOOD) Payment for Order Flow business model

SEC Chairman Gary Gensler talked about a ban of the Fee for Order Stream enterprise mannequin remains to be on the desk in an interview with Barron’s.

The Securities and Trade Fee finds itself at an investing crossroads in 2021. The meme inventory revolution put a highlight on many insufficient rules governing the market, and SEC Chairman Gary Gensler spoke to Barron’s about ongoing efforts to guard buyers. One matter that precipitated Robinhood’s inventory to drop as we speak is Fee for Order Stream. Gensler stated {that a} flat out ban of the enterprise mannequin remains to be very a lot “on the desk.”

Robinhood (HOOD) shares fell nearly 8% today on the news that their Payment for Order Flow business model may be banned by the SEC.
Robinhood (HOOD) shares fell almost 8% as we speak on the news that their Fee for Order Stream enterprise mannequin could also be banned by the SEC.

In an interview with monetary publication Barron’s, SEC Chairman Gary Gensler spoke in regards to the Fee for Order Stream (PFOF) framework that presently exists in the USA inventory market. PFOF is a setup the place brokers ship commerce orders to market makers in alternate for a portion of the income from executing the commerce. Within the case of Robinhood, most trades are executed by Citadel. This may occasionally all come to a screeching halt a while within the close to future, because the chairman confirmed that ban of PFOF remains to be “on the desk.” Gensler went on to explain what he views as “an inherent battle of curiosity,” stating that brokers “get the info, they get first look, they get to match off patrons and sellers out of that order stream. That will not be essentially the most environment friendly markets for the 2020s.”

Gensler isn’t alone. The SEC Chairman talked about a number of occasions through the interview that Australia, Canada, and the UK have already banned Fee for Order Stream techniques. The chairman additionally said that the SEC isn’t just targeted on PFOF, “Additionally on the desk is how can we transfer extra of this market to transparency. Transparency advantages competitors, and effectivity of markets. Transparency advantages buyers.” 

Most brokers solely generate about 10% of their revenues from PFOF preparations with market makers, however Robinhood depends on Payment for Order Flow for 80% of gross sales. That will clarify why the corporate’s inventory took a dump this afternoon when this interview was revealed. Robinhood touts their service as being nice for patrons as a result of they do not cost commissions on trades, however the firm nonetheless monetizes their customers, and their present setup result in points with executing trades through the January 2021 brief squeeze of GameStop shares. 

Solely time will inform if SEC Chairman Gary Gensler will really take motion on Robinhood and market makers like Citadel, or if that is simply extra gum-flapping from a Wall Avenue regulator with ties to Goldman Sachs. On the very least, Gensler’s feedback spooked buyers sufficient to dump their Robinhood (HOOD) shares which at the moment are down almost 50% from their all-time excessive reached earlier this month.

Are you a Robinhood shareholder? Do you assume Fee for Order Stream techniques are corrupt conflicts of curiosity? Do you assume the inventory market is a rigged sport? Would you like me to cease asking you questions? Tell us your ideas within the feedback part beneath. We actually need to hear your opinion.

This text is just meant for instructional functions, and shouldn’t be taken as funding recommendation. Please take into account your personal funding time horizon, threat tolerance, and seek the advice of with a monetary advisor earlier than appearing on this info. | SEC contemplating ban of Robinhood’s (HOOD) Fee for Order Stream enterprise mannequin


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