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

SEC Chairman Gary Gensler mentioned a ban of the Payment for Order Flow business model is still on the table in an interview with Barron's.


The Securities and Exchange Commission finds itself at an investing crossroads in 2021. The meme stock revolution put a spotlight on many inadequate regulations governing the market, and SEC Chairman Gary Gensler spoke to Barron's about ongoing efforts to protect investors. One topic that caused Robinhood's stock to drop today is Payment for Order Flow. Gensler said that a flat out ban of the business model is still very much "on the table."

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 nearly 8% today on the news that their Payment for Order Flow business model may be banned by the SEC.

In an interview with financial publication Barron's, SEC Chairman Gary Gensler spoke about the Payment for Order Flow (PFOF) framework that currently exists in the United States stock market. PFOF is a setup where brokers send trade orders to market makers in exchange for a portion of the profits from executing the trade. In the case of Robinhood, most trades are executed by Citadel. This may all come to a screeching halt some time in the near future, as the chairman confirmed that ban of PFOF is still "on the table." Gensler went on to describe what he views as "an inherent conflict of interest," stating that brokers "get the data, they get first look, they get to match off buyers and sellers out of that order flow. That may not be the most efficient markets for the 2020s."

Gensler is not alone. The SEC Chairman mentioned multiple times during the interview that Australia, Canada, and the United Kingdom have already banned Payment for Order Flow systems. The chairman also stated that the SEC is not just focused on PFOF, “Also on the table is how do we move more of this market to transparency. Transparency benefits competition, and efficiency of markets. Transparency benefits investors.” 

Most brokers only generate about 10% of their revenues from PFOF arrangements with market makers, but Robinhood depends on Payment for Order Flow for 80% of sales. That would explain why the company's stock took a dump this afternoon when this interview was published. Robinhood touts their service as being great for customers because they don't charge commissions on trades, but the company still monetizes their users, and their current setup lead to issues with executing trades during the January 2021 short squeeze of GameStop shares. 

Only time will tell if SEC Chairman Gary Gensler will actually take action on Robinhood and market makers like Citadel, or if this is just more gum-flapping from a Wall Street regulator with ties to Goldman Sachs. At the very least, Gensler's comments spooked investors enough to dump their Robinhood (HOOD) shares which are now down nearly 50% from their all-time high reached earlier this month.

Are you a Robinhood shareholder? Do you think Payment for Order Flow systems are corrupt conflicts of interest? Do you think the stock market is a rigged game? Do you want me to stop asking you questions? Let us know your thoughts in the comments section below. We really want to hear your opinion.

This article is only meant for educational purposes, and should not be taken as investment advice. Please consider your own investment time horizon, risk tolerance, and consult with a financial advisor before acting on this information.

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