Robinhood (HOOD) - Get Robinhood Report shares extended declines Tuesday following a warning from Securities and Exchange Commission Chairman Gary Gensler on the future of so-called 'payment for order flow'.
In an interview published Tuesday in Barron's, Gensler said the SEC is considering myriad changes to the controversial 'payment for order flows' (PFOFs) practice, adding that a full bank is "on the table" as staff reviews continue.
Around 75% of Robinhood's $959 million in 2020 revenues were linked to PFOFs, with Robinhood itself noting in filings ahead of its $2.1 billion IPO that new regulations on PFOFs could trigger "significant changes to our business model", while also detailing a series of regulatory and legal challenges linked to everything from anti-money laundering and cybersecurity to allegations of unethical conduct and lapses in transparency.
Robinhood shares were marked 1.9% lower in pre-market trading Tuesday to indicate an opening bell price of $42.83 each, a move that would extend the stock's decline from its post-IPO high to around 50%.
Payment for order flow occurs when a retail broker such as Robinhood sends its client orders to a single market-maker -- instead of an exchange -- and gets a rebate from the wholesale broker in return. Those payments, Robinhood says, allow it to offer commission-free trading to its 18 million customers.
"Robinhood explicitly offered to accept less price improvement for its customers in exchange for receiving higher payment for order flow for itself," Gensler said last month in a speech during which he addressed by 'conflict of interest concerns' and the 'gamification' of stock trading on retail brokerage platforms.
"As a result, many Robinhood customers shouldered the costs of inferior executions; these costs might have exceeded any savings they might have thought they’d gotten from zero commission trading."
PFOFs aren't the only regulatory and legal challenge Robinhood will face over the coming months, as the Menlo Park, California-based group must address also address a joint FINRA/SEC investigation into whether its employees traded shares in fast-moving meme stocks such as GameStop (GME) - Get GameStop Corp. Class A Report prior to imposing controversial restrictions on customers in late January.