Robinhood’s stock fell on Monday after the brokerage app received news that there might be a possible ban on paying for order flow.
SEC Chairman, Gary Gensler said in an interview with Barron’s on Monday that a complete ban on paying for order flow is “on the table.”
As a result, Robinhood’s shares dropped 6.9% to $43.64 per share.
Payment for order flow; the back-end payment brokerages receive for sending clients’ trades to market makers has “an inherent conflict of interest,” according to Gensler.
In January, an extraordinary short squeeze in GameStop’s stock forced Robinhood to restrict trading on some assets. According to Robinhood, if the PFOF model changes, the brokerage and industry will be able to adapt.
Gensler’s statement came after the SEC said Friday it is stepping up its inquiry into so-called gamification and behavioural prompts used by online brokerages and investment advisors to encourage people to trade more stocks and other securities
On Monday, Robinhood’s stock was already down after it was reported that PayPal is looking into ways to allow consumers to trade individual equities.
What you should know
Payment for order flow is a technique in which brokers convey trade orders to market makers, who then execute them in exchange for a percentage of the profits.
Last month, Robinhood went public on the Nasdaq, gaining access to the public markets that it aims to democratize for amateur investors. Robinhood’s stock has been on a roller coaster since its launch. The company had a meme stock moment when it rebounded 50% on retail investor interest after plunging in the first few days of trading.
In February, Robinhood CEO Vlad Tenev was required to testify before the US House Financial Services Committee. Payment for order flow has been chastised by legislators due to its confrontation with market makers such as Citadel Securities.
