Robinhood could lose main revenue stream as SEC ponders ban for payment for order flow
Broker-dealer app Robinhood could be in for a choppy ride if the latest comments from U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler are to be believed, indicating plans that could see the practice of payment for order flow outlawed by the regulator.
In an interview published in Barron’s this week, Gensler said the practice, which makes up the mainstay of Robinhood’s revenue, is in line for an outright ban, with the agency actively deliberating whether the practice should be allowed to continue.
Payment for order flow involves the outsourcing of trade execution to a third party, with Robinhood acting as a market maker for transactions on behalf of the third party in exchange for a commission. So rather than buying through Robinhood directly, its users are actually transacting through a third party, via the Robinhood platform.
Gensler’s comments saw share prices for Robinhood tumble, which markets its service as a trading platform that doesn’t charge a commission on transactions.
The SEC chair said that by removing payment for order flow and other such practices, markets benefit from more efficient, transparent trading. For Gensler, markets function better when all the data is public.
“Transparency benefits competition, and efficiency of markets. Transparency benefits investors.”
“They get the data, they get the 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.”
It comes as Robinhood pledged to diversify its digital currency offering further, expanding to offer new tokens and related services.
With payment for order flow accounting for the vast majority of its revenue, followed by trading in joke digital currency Dogecoin, there has arguably never been a more pressing time for the company to find a sustainable footing on which to operate.
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