But new regulations teased by the US Securities and Exchange Commission have raised questions about the future of the no-fee business model and are triggering strident debate on Wall Street about whether such changes are really necessary.
Robinhood, or your broker of choice, takes your order to a firm known as a wholesaler or market maker. These are the middlemen who are supposed to get you the best price, and who pay the brokers for the privilege of routing them batches of trades. They typically make pennies off each transaction.
That process is known as “payment for order flow.” It has come under intense scrutiny by regulators following the fallout from the January 2021 run-up in meme stocks like GameStop.
The GameStop frenzy “exposed how rigged the US equity markets are to enrich big Wall Street firms, high frequency trading firms and brokers at the expense of Main Street retail investors,” Dennis Kelleher, the CEO of Better Markets — a nonprofit aimed at protecting Americans from Wall Street’s excesses — wrote at the time.
The SEC has been reviewing the system, which accounts for the bulk of how brokerages like Robinhood make money. Gensler said Wednesday that the agency is considering whether to add more competition at the middleman level to ensure retail investors are actually getting the best prices.
In that scenario, orders would be routed into auctions where trading firms would have to compete to execute them.
“It’s not clear … that our current national market system is as fair and competitive as possible for investors,” Gensler said.
The takeaway: This all gets very technical. But Wall Street is warning that the consequences of such moves could be huge, and that no-fee trading could be a casualty of the SEC’s potential revamp.
Shares of Robinhood fell 4% on Wednesday. They’re now down 53% year-to-date. Charles Schwab’s stock, which is off 22% in 2022, dropped nearly 3%.
“Retail investors in particular enjoy the greatest access and lowest cost to investing that they have ever experienced,” the Securities Industry and Financial Markets Association, a lobby group, said in a statement. “Changes that could impact those costs by eliminating low or zero-dollar commissions or limiting order execution venues should be reviewed closely and be subject to robust cost benefit analysis.”
Speaking at the same conference as Gensler, Robinhood Chief Legal Officer Dan Gallagher said that he feels the SEC is presenting “a solution looking for a problem.”
“It is a really good climate for retail, so to go in and muck with it right now, to me, is a little worrisome,” he said.
But Kelleher of Better Markets said that Gensler’s proposed reforms were “reasonable” and “modest,” and would build essential public …….
Source: https://www.cnn.com/2022/06/09/investing/premarket-stocks-trading/index.html