Robinhood shares see 14% one-week drop in wake of coming PFOF ban
Shares of next-gen online broker Robinhood (NASDAQ:HOOD) shed 14% of their value last week, as U.S. Securities & Exchange Commission (SEC) Chair Gary Gensler made a mid-week speech outlining some proposed changes to the way retail brokers make money.
Specifically, the SEC is looking to ban payment-for-order-flow (or PFOF, as it is known in the industry). PFOF is already banned in Australia, while the EU considers PFOF outside the parameters of its MiFID rules, although it has not explicitly been banned.
Robinhood shook up the online brokerage industry in the US over the past half decade by offering commission-free trading, forcing its older established rivals such as E*Trade, TD Ameritrade and Charles Schwab to follow suit. The company was able to do so because it made money by selling its retail client order flow to market makers.
Now, the SEC is looking to introduce new rules that will prevent the outright packaged sale of retail client trades, or PFOF. While an exact alternative model has not yet been mapped out, apparently the SEC wants a more competitive alternative, where individual (or group) client orders are auctioned off or competed for in some orderly fashion, guaranteeing the best price to retail traders on every trade.
And that would put a serious crimp into the revenue stream of Robinhood, and some of the other commission-free brokers who rely on selling client order flow.
“Helping out” the fall in Robinhood shares was some very negative sentiment generally in the equity markets last week, with the broad S&P500 index trading down by 5.1% over the past five trading days, including a 2.9% fall on Friday.
At its current share price of $7.81 (Friday’s close), Robinhood is valued at about $6.8 billion – well above the $8.8 billion that rival eToro still, officially, plans to go public at via a SPAC merger. However those plans are likely to be altered or abandoned altogether, with eToro apparently looking at alternatives to its SPAC merger.
Robinhood share price, July 2021 IPO to present. Source: google Finance.