At the beginning of the week, 30 august, Robinhood broker shares (Nasdaq: HOOD) fell on 6,9 %, to 43,6 $, in the face of several negative news reports.
In a conversation with Barron's, the head of the US Securities and Exchange Commission (SEC) Gary Gensler reported, that there is an “obvious conflict of interest” in paying for referral traffic.
Payment for the flow of appeals (payment for order flow) is robinhood's main source of income. Broker does not charge clients a commission for transactions, but implements information about transactions to market makers - large money companies. Such companies act as traders and buyers on the stock exchange, therefore, customer requests are often not executed at the best cost. Later, market makers share part of the income with Robinhood. More details of the business broker Robinhood we analyzed in the review of the company.
"We believe, that payment for the flow of requests is the best solution for our customers, than the ancient scheme with commissions. Financiers can invest the smallest amounts and not worry about the size of commissions. ", Robinhood's chief financial officer Jason Varnick said before its IPO.
Now the SEC wants to limit this practice., how to pay for the flow of requests. According to Gensler, market makers have an advantage: "They're the first to get the data and can compare buyers and sellers.. May be, it's not the most efficient market in the 2020s.".
In England, In Canada and Australia, the payment for the flow of appeals is illegal. As Gensler emphasized, USA can follow the example of these states: "We are already discussing this issue".
Before that, the SEC already had claims against Robinhood. The regulator reported, that due to the peculiarities of the broker's work, investors have lost more, than if they paid a commission for transactions. Then Robinhood denied all the accusations., but paid a fine in 65 million dollars.
And last week, the commission suspected online brokers of gamifying their trading applications.. We have already talked about this in our news digest. According to the regulator, gamification and different clues push investors to make more trades, including the ill-advised.
Also on Monday it became known, what is paypal (NASDAQ: PYPL) may compete with Robinhood in the future. According to one source, fintech hired an experienced specialist from the brokerage industry, that he headed the previously unknown unit invest at PayPal. PayPal shares rose by 3,6%, to 288,5 $.
