SEC Chair Gary Gensler, in an interview with Barron’s did not rule out a full ban on brokers selling order-flow to market makers. Robinhood shares fell 6.89%.
Most brokers have moved away from charging commissions for trades. They have shifted to a model in which revenue is generated by passing client order information to large players, such as high-frequency trading firms.
A market maker executes a trade and profits from the difference between the bid and ask prices, sending part of that profit back to the broker.
According to Gensler, an “inherent conflict of interest” cannot be ruled out here. The official did not specify whether the SEC has found cases where investors suffer losses. The role of market makers extends beyond providing a small spread on every trade, he added.
“They bring buyers and sellers together in these streams. Investors at the outset may receive less from their sells and pay more when buying. This could hinder fair and efficient markets,” he explained.
Gensler emphasised that selling order flows is prohibited in the United Kingdom, Australia and Canada. He did not rule out introducing a similar ban in the United States. The Commission is studying this practice and could present proposals on this matter in the coming months.
“We are looking at this issue. Also in our sights are measures to increase transparency of this market. This will benefit investors,” said the head of the SEC.
The publication notes that this type of activity generates no more than 10% of revenue for most brokers. For Robinhood, the figure runs around 80%.
After Barron’s article was published, Robinhood shares extended their decline, closing August 30 down 6.89%. In after-hours trading the decline continued.
In its conference with analysts following the second-quarter results, Robinhood CFO Jason Warnick questioned the introduction by the SEC of a ban on selling client order flows. Given the small commissions (he cited $0.02–$0.025 per $100), the company will be able to find a substitute for this revenue stream.
Earlier, the online broker settled a dispute with the SEC. The regulator found that from 2015 to 2018 Robinhood earned a larger spread, while other brokers offered clients more attractive prices on trades. In their case there was an 80/20 ratio in favor of clients, whereas for the company the reverse.
Robinhood declined to comment to Barron’s.
In July the company raised the potential penalty from NYDFS by twofold.
According to the second-quarter results, Robinhood received more than 40% of all revenue from crypto trading.
In July its founder Vlad Tenev named digital assets as the cornerstone of the company’s future development.
At Robinhood is working on implementing crypto-wallet related features, as well as launching new products, including lending and savings accounts in digital assets. In addition to this, Bloomberg discovered testing of a feature to shield crypto investors from volatility.
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