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Shares of Robinhood (HOOD, $9.65) rose to more than 10% in morning trading after a report that the US Securities and Exchange Commission (SEC) would stop short of banning payment for order flow. However, it did fall 2.7% overall despite its fast start to the day.
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Payment for order flow is a critical source of revenue for Robinhood. Through the practice, brokerages route many of their customers' orders to a few big electronic trading firms such as Citadel Securities and Virtu Financial Inc. and collect payments from those firms in return.
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The structure has come under regulatory scrutiny following the 2021 meme stock frenzy, with critics like SEC chairman Gary Gensler arguing it has contributed to creating unfair conditions for retail traders.
Why it matters
Robinhood stock is down more than 40% year to date as the brokerage firm has seen user growth reverse after rapidly expanding during 2020 and 2021. Elsewhere, shares of market maker Virtu Financial rose more than 8% following the report. Despite the SEC report stating that will stop short of banning payment for order flow, it may still enact other changes to make the practice less profitable. The final decision hadn’t been made on the scope of changes the SEC is planning to make to restructure markets.
