Gary Gensler’s Comments Affected Shares of Robinhood
It was not an easy day for Robinhood, as its shares declined amid several bouts of bad news for the brokerage app. Its stock fell 6.9% to $43.64 per share on Monday after the Securities and Exchange Commission’s Chairman Gary Gensler mentioned one very interesting detail. Gensler told Barron’s that banning the controversial practice of payment for order flow is “on the table”. In spite of challenges, its stock is up more than 24% this month as of August 30.
Gary Gensler stated that payment for order flow-the back-end payment brokerages receive for directing clients’ trades to market traders-has “an inherent conflict of interest”. Payment for order flow is the company’s one of largest revenue sources. Also, the company is able to provide zero-commission trading thanks to the method criticized by Gensler. Nonetheless, payment for order flow is a controversial practice that attracted attention from the Financial Industry Regulatory Authority and Main Street.
The commission’s spokesperson declined to comment for this story. In the past, the commission’s boss stated that an outright ban of payment for order flow was among several options the commission could introduce.
The Securities and Exchange Commission said it will also consider clearer and more rigorous brokerage disclosures as another option.
Robinhood and its business model
Following a short squeeze in GameStop’s stock in January Robinhood was forced to limit trading on certain securities. Lawmakers criticized payment for order flow for the conflict it has with the market makers like Citadel Securities.
The company’s CFO Jason Warnick explained the company’s position during Robinhood’s virtual roadshow before its IPO. It went public on the Nasdaq in July, hitting the public markets it seeks to democratize for amateur investors. Robinhood’s shares fell on the first few days of trading. But Robinhood also had a meme stock moment when it rallied 50% amid retail investor interest.
Robinhood thinks that payment-for-order flow is a better deal for its customers, vs. the old commission structure. Thanks to it, investors can invest smaller amounts without having to worry about the cost of commissions.
Gary Gensler’s interview came after the commission’s decision. The Securities and Exchange Commission decided to step up its inquiry into so-called gamification. It also plans to gather more information about behavioral prompts used by online brokerages and investment advisors. They are using various methods to prod people to trade more stocks and other securities.
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