Robinhood risks abandoning its main revenue stream as payment for order flow because according to SEC chairman Gary Gensler, these practices are controversial and inefficient for the consumers so let’s read more in our latest crypto news.
Gary Gensler said that the SEC could ban payments for order flow because it is a controversial practice employed by Robinhood and can become expensive for the users. The pressure could speed up Robinhood’s continuing expansion into crypto offerings so the executives at stock and crypto trading app Robinhood vowed to diversify the revenue sources in the upcoming months and expand the appeal to crypto users.
In an interview with Barron’s published today, US Securities and Exchange Commission Chairman Gary Gensler explained that the agency is considering banning the payment for order flow practices and trading in HOOD shares dropped right away because these practices have traditionally been responsible for the bulk of the revenue. The payment for order flow or PFOF entails outsourcing the execution of stock trades to third parties so when someone buys a stock on Robinhood, another company paid the fractions of a penny per share to match the buyers and sellers. Using price data analysis, these market makers can execute the trade efficiently and Robinhood can take a cut of the proceedings which is why Robinhood risks abandoning its main revenue stream.
The market makers provide liquidity which makes reasonably priced trades possible and they can even improve the trading prices for the customer as they have to be able to match if not beat the orders placed directly on a US stock exchange in line with the National Best Bid and Offer. Some however are responsible for raising overall prices by keeping the trades off of exchanges and make larger spreads on trades. Others say that the data that the market makers receive will reduce competition over time as companies price other market makers out which leads to larger spreads and Gensler agreed that it could be better if this data is public:
“They get the data, they get the first look, they get to match off buyers and sellers out of that order flow. That may not be the most efficient markets for the 2020s.”
In its Q2 earnings announcement, Robinhood CEO Vlad Tenev remained committed to the new product additions, including a crypto wallet and more crypto for trading. The listed coins are the main source of non-PFOR revenue for the company. In the earnings call, it’s first as a publicly traded company as Robinhood revealed that 60% of accounts with funds in them starting to trade crypto for the first time.
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