Robinhood Extends Slump on Payment for Order Flow Ban Fears

(Bloomberg) — Robinhood Markets Inc. continued to slide in premarket trading after U.S. Securities and Exchange Commission Chairman Gary Gensler said a full ban on payment for order flow is “on the table.”

Robinhood fell about 3.3% in early trading Tuesday after Gensler told Barron’s the day before that paying for order flow — where brokerages send customer orders to trading firms and receive payments in return — has “an inherent conflict of interest.”

Gensler has previously made similar points about the practice, which has been in Washington’s crosshairs for months as policy makers scrutinize the mechanics of retail trading in the wake of the run-up in meme stocks like GameStop Corp. Still, any mention of an outright ban can rattle investors in part because payment for order flow makes up a significant share of Robinhood’s revenue: the company brought in about 80% of its second-quarter revenue from payments for its customers’ stock, options and cryptocurrency transactions.

Brokers like Robinhood profit by selling trades, prompting some lawmakers to question whether that encourages firms to push clients to engage in excessive buying and selling. In the Monday interview with the online news publication, Gensler said it allows market makers to get a “first look” at transaction data that may lead to unfair advantages.

Read More: What is ‘Payment for Order Flow’: QuickTake

Gensler has also previously pointed out that countries including the U.K. have already prohibited payment for order flow. Some in the financial industry have questioned whether the SEC would need additional authority from Congress to ban the practice outright.

Jaret Seiberg, a policy analyst at Cowen Inc., said that it would be difficult to make any big changes to the system.

“Gensler has other priorities and he is unlikely to move directly against payment for order flow given the complexity of the issue and the complicated politics that surround payment for order flow,” Seiberg wrote in a note.

What Bloomberg Intelligence Says:

“He didn’t rule out banning PFOF, but we don’t think he’s strongly inclined to do so, perhaps opting instead to propose amendments as soon as 4Q. Studies have found PFOF led to favorable prices for retail investors, so regulation to enforce good execution is a more likely outcome than a ban.”– Julie Chariell, BI senior fintech industry analyst

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(Updates with stock price, analyst quotes starting in second paragraph.)

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