Robinhood (NASDAQ:HOOD), a social trading platform providing access to both traditional securities and crypto, is seeing a bump in its share price as chatter indicates that the practice of Payment for Order Flow – will remain in place.
Robinhood promotes is a fee trading service for its customers opting to generate revenue from Payment for Order Flow. This is the practice where a firm processes all trades – paying for this opportunity – which provides insight into trading activity. Its crypto trading is also commission free.
In 2021, a Robinhood executive discussed the practice of Payment for Order Flow in a blog post in a move to clarify the process.
At that time, Robinhood reported that its trading platform allows competition between dealers thus providing a better price for trades:
“our routing system incentivizes the market-makers we have relationships with to compete for order flow by giving you a better price than the one you were quoted at the time your order was placed. This algorithm prioritizes sending your order to a market maker that’s likely to give you the best execution, based on historical performance.”
Robinhood said it earned just $0.0023 per equity share traded during the fourth quarter of 2020.
While there are several firms that dominate Payment for Order Flow – there is competition and firms are required to offer the best price possible.
Both the Securities and Exchange Commission (SEC) as well as various elected officials, investigated the process of Payment for Order Flow. At least one US Senator Pat Toomey moved to keep Payment for Order Flow with legislation aimed at preserving no commission trading.
It now appears that the consensus is that the initial hubris is much ado about nothing and Robinhood will be able to continue the practice, thus allowing its users to benefit from the low-cost trades.
A report by Bloomberg indicates that after “months of internal deliberations” the SEC has decided to pass on an outright ban although additional guidelines may make the practice less profitable. A pronouncement on the SEC’s decision is expected in the coming months.
If you are interested, an executive with Virtu, a firm providing Payment for Order Flow, explained last year how the process works in this interview with CNBC .