Robinhood tanks after SEC chair tell Barron's that banning payment for order flow is a possibility


September 01, 2021:-On Monday, shares of Robinhood dropped between several bouts of bad news for the brokerage app.

Robinhood’s stock decreased 6.9% to $43.64 for each share after Securities and Exchange Commission Chairman Gary Gensler told Barron’s that the ban of the controversial practice of payment for order flow is “on the table.”

Gensler said that the outlet that payment for order flow that the back-end payment brokerages receive for directing clients’ trades to market makers has “an inherent conflict of interest.”

Payment for order flow is one of Robinhood’s most significant revenue sources and the way the millennial-favored stock trading app can provide zero-commission trading. Payment for order flow is a controversial practice that has got attention from the Financial Industry Regulatory Authority and Main Street.

Gensler has for months said that an outright ban of payment for order flow is from several options the regulator could introduce.

The SEC has also considered more transparent and more rigorous brokerage disclosures as another possible alternative.

Following an epic short squeeze in stock of GameStop in January that forced Robinhood to limit trading on specific securities, Robinhood CEO Vlad Tenev was forced to testify to the U.S. House Financial Services Committee in February. Legislators criticized payment for order flow for the conflict it has with market makers such as Citadel Securities.

“We think payment-for-order flow is a better deal for our customers, vs. the old commission structure. It is allowing investors to invest smaller amounts without having to worry about the cost of commissions,” Robinhood CFO Jason Warnick said the virtual roadshow of the company before its IPO.

Robinhood has said that if the PFOF model changed, the brokerage and the industry would adapt.

On Friday, Gensler’s comments come after the SEC said it is stepping up its inquiry into so-called gamification and behavioral prompts used by online brokerages and investment advisors to prod people to trade more stocks and other securities.

On Monday, shares of Robinhood were already lower after CNBC reported that PayPal is exploring ways to let users trade individual stocks.

According to one of the sources, the expansion has hired a brokerage industry veteran to lead “Invest at PayPal,” an unreported division of the payments giant.

Robinhood went public on the Nasdaq in the previous month, hitting the public markets it seeks to democratize amateur investors. Since the debut, shares of Robinhood have had a wild ride. After the sink on the first few days of trading, the company had a meme stock moment when it rallied 50% between retail investor interest.

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