Robinhood Markets Inc (NASDAQ:HOOD) recovered slightly from its drop on open, now down 1.4% to US$8.27 after the Securities and Exchange Commission (SEC) suggested new rules on free trading.
Retail brokers may no longer be allowed to offer trading via ‘payment for order flow’ (PFOF) as the SEC chair Gary Gensler looked for ways to give investors better prices.
PFOF is where some retail brokers, including Robinhood, Charles Schwab Corp and TD Ameritrade, sell their customers’ orders for a profit to giant Wall Street market makers such as Citadel Securities and Virtu Financial.
In the first quarter of 2022, Robinhood made around three-quarters of its turnover from PFOF, with Bloomberg calculating that in total brokers earned US$3.8bn from PFOF last year and US$2.8bn in 2020.
One of Gensler’s proposals is to send trade orders to an auction mechanism, similar to techniques used in the options market.