Shares of Robinhood, a US online brokerage with online celebrities, fell nearly 7 per cent on Monday after Gary Gensler, chairman of the Securities and Exchange Commission (SEC), said a ban on controversial order flow payments (Payment for Order Flow,PFOF) was "on the table".
Gensler told the media that order stream payments had an "inherent conflict of interest", but did not say whether SEC had found that the conflict of interest caused investors to suffer losses. Gensler stated that staff were reviewing this practice and were likely to make recommendations in the coming months.
Order stream payments are one of Robinhood's largest sources of revenue, which refers to the returns or compensation the company receives by sending users' stock, options and cryptocurrency orders to high-frequency market makers. Although this type of payment is very small, it can be very profitable to forward a large number of orders to third parties for processing. Order stream payment is a controversial practice, which has attracted the attention of the Financial Industry Regulatory Authority.
Robinhood has said that if the PFOF model changes, brokerages and the industry will be able to adapt.
Gensler's comments came after SEC said on Friday that it was stepping up its investigation into "gamification" and encouraging trading features in online brokerage trading software, which are used by online brokerages and investment advisers to stimulate retail investors to trade more stocks and other securities and take more risks.
As of Monday's close, Robinhood shares were down 6.89% at $43.64. The stock rose more than 24 per cent in August.