On Monday, Gary Gensler, chairman of the Securities and Exchange Commission (SEC), in an interview with Barron’s, said that a ban on payment for order flow was “on the table.” As a result of this statement, once again, Robinhood shares fell as this is one of the largest sources of the app’s revenues.
Earlier in the day, Robinhood shares fell when CNBC said that PayPal was exploring ways that would allow users to trade individual stocks, a practice that is responsible for its huge growth. Robinhood stock has seen volatility right from the day it was listed on the Nasdaq last month.
Robinhood, the app that is extremely popular with individual traders, many of whom are millennials, provides zero-commission trading to its users mainly through its revenues gained by the payment for order flow practice. The practice is controversial and has gained a lot of attention from Wall Street and the Financial Industry Regulatory Authority.
From weeks, SEC chair Gensler had been indicating that the regulatory body was considering an outright ban of the practice as well as other options. Earlier on Friday, the SEC had also announced that its inquiry into gamification would be stepped up. It would also study the practice of behavioral prompts that influence people to trade on stocks and securities.
When Robinson limited trading on certain securities, following the January short squeeze in GameStop Inc. Vlad Tenev the CEO of Robinhood had to testify before a U.S. House Financial Services Committee, the following month.
Lawmakers had criticized the payment for order flow practice by the app as it created conflict with market makers including Citadel Securities and Virtu Financial, who earned a lot through sheer volume of data provided to them.
Before going public, Robinhood CFO Jason Warnick had said that the app considered payment-for-order flow a better deal for their users when compared with the traditional commission structure as users could invest small amounts without paying commissions.
However, Robinhood officials also said that if the payment for order flow practice (PFOF) was changed, the company would be able to adapt. Its competitors such as E-Trade and Charles Swab also use this practice.
The New York Times reported that Citadel has not as yet commented and that Virtu had declined to comment, when asked for a response.