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Robinhood shares declined due to a possible ban on payment for order flow

NEW YORK, NEW YORK – JULY 29: Baiju Bhatt and Vlad Tenev pose in Times Square on Robinhood Markets IPO Listing Day on July 29, 2021 in New York City. (Photo by Cindy Ord/Getty Images for Robinhood)

220.7% is the current return for Global Technologies Private Portfolio clients who purchased Robinhood shares in July 2020. Lock-up period is until early December.

Gary Gensler, chairman of the US Securities and Exchange Commission (SEC), told Barron’s on Monday that the Commission is discussing the possibility of banning payment for order flow. According to him, PFOF carries a conflict of interest.

When paying for the flow of orders, the broker executes clients’ orders for the purchase/sale of assets, not the broker itself, but through market makers — and receives compensation for this. This scheme gives the broker the ability to set zero commissions for investors, as Robinhood does.

The problem is that the order execution price may not be optimal, since market makers make money on the spread between the price of buying and selling an asset. Although this spread is not large — the broker receives 2–2.5 cents compensation for a $100 trade, the mechanism is not transparent to the investor.

Due to the darkness of the scheme, payment for the flow of orders is prohibited in Canada, Australia and the UK. In the US, however, it is one of the most significant sources of income not only for Robinhood but also for many other brokers and market makers.

The question of a possible ban on PFOF in the United States has already been raised, but it has acquired a clear sound only now, after Gensler’s statement. However, the ban is only one of the options for resolving the issue. The Commission is also considering the option of clearer disclosure of information about PFOF brokers.

The discussion and adoption of a decision by the Commission, most likely, will take more than one month since many players in the American stock market are interested in the topic. As for Robinhood, today almost 80% of its revenue comes from payment for order flow.

As a result, Robinhood shares suffered a 4.5% decline on August 30–31. Robinhood, however, previously stated that prohibiting payment for order flow could rebuild the profit model. For example, Robinhood can become a market maker and start executing orders or introduce commissions for users.