The popular brokerage says a set of Securities and Exchange Commission proposals will turn the clock back to the days before zero-commission trading, when investors had to pay fees to buy and sell stocks.
In Robinhood’s first extended comments about the SEC’s proposals since its release in December, two company executives in an interview with The Wall Street Journal described the agency’s plan to ban Payments for Order Flow, or PFOF. Said backdoor attempt. It is a practice in which electronic trading firms known as wholesalers give brokers a share of their profits from executing investors’ orders.
Paying for order flow is a key part of Robinhood’s business model, which is set to report fourth-quarter results on Wednesday. Critics of the practice, including SEC Chairman Gary Gensler, say it poses a conflict of interest for brokers. But PFOF made it possible for firms like Robinhood to make money without charging commissions, and it opened the door to zero-commission trading, which brought millions of new investors into the stock market during the pandemic.
Robinhood chief brokerage officer Steve Quirk said, “If you think about the impact of these offers, you’re essentially closing the door and saying we liked it better when it was the old boys’ club.” “
Robinhood leans heavily on PFOF even as it has begun to rely more heavily on other revenue streams such as collecting interest on cash balances. Through the third quarter of 2022, the company expects routing stock and options orders to generate 43% of its total net revenue.
The SEC says its proposals are aimed at giving investors a better deal on trades. Their centerpiece plan is to have retail brokerages send many of their customers’ orders to auctions, where high-speed traders and other firms can compete to execute each order. The idea is to drive out competitive forces so that investors can get a better price.
Mr Quirk said “we will do everything in our power” to make sure Robinhood doesn’t start charging commission. But other brokers may be forced to revive commissions, he said.
Speaking alongside Mr. Quirk, Robinhood Deputy General Manager Lukas Moskovitz said he expected the SEC to soften its proposals, which dropped out of a review prompted by frenzied trading in GameStop Corp. in early 2021. He criticized the agency for rushing through sweeping changes. With insufficient industry input.
Mr. Moskovitz said, “I have never seen an attempt to rule out such a large size and complexity and interconnectedness all at the same time, so quickly, with so little advance study and discussion.”
An SEC spokeswoman said members of the public can comment on the proposal through the agency’s website.
Anthony Denier, chief executive of Robinhood rival Waybull, said his firm may look for other ways to make money if payments for order flow dry up. But he warned that the changes would hurt smaller competitors, noting that Webble relied heavily on PFOF in its early years.
“Any company that wants to be the next Webull or the next Robinhood won’t even have a chance to grow,” he said.
Others are skeptical that the SEC’s plan could revive the commissions, dismissing such claims as self-serving and alarmist. Tyler Gelash, president of the Healthy Markets Association, an investor group, said, “Any broker seeking to impose new costs will face stiff competition from brokers who have already figured out how not to take PFOF or charge commission.” Needed.”
Last year, the dozen largest retail brokers collected $3.1 billion in PFOF, according to data from Bloomberg Intelligence. The SEC’s proposals don’t contain any explicit restrictions on the practice, but various elements of the proposals could slow down that stream of payments.
For example, the offer of auctions imposes a limit on the discounts that the auction operator can send to brokers. This cap—which the SEC is proposing to set at 5 cents per 100 shares—would effectively limit PFOF to orders executed at auctions. In December, Robinhood made 25 to 44 cents per 100 shares of S&P 500 stocks to route market orders to wholesalers, regulatory filings show.
Another threat to PFOF lies in a separate SEC proposal to clarify the duties of brokers to provide the best possible execution for clients. If implemented, the proposal would impose onerous requirements on any brokerage engaged in a “contralateral transaction” — in other words, any trade for which the broker receives payment for order flow. each business.
Unlike an auction scheme, the best-execution offer is applicable to options as well as equity. This could affect the lucrative business of PFOF options, which account for nearly twice as much brokerage revenue as PFOF, Bloomberg Intelligence data show.
Even the SEC says the rule could harm brokers. In an analysis accompanying the proposal, the agency says the new requirements could increase the profits of large brokers and drive some smaller brokers out of the market.