Investors May Want to Avoid Robinhood Markets Stock For Now

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Robinhood Markets (HOOD) can’t catch a break.

After slipping just yesterday on news PayPal could offer a stock-trading platform for U.S. customers, SEC Chairman Gary Gensler says that banning “payment for order flow” could wiped out entirely. Payment for order flow is a practice “where brokers send trade orders to market makers that execute those trades in return for a portion of the profits,” according to Barron’s.

In addition, as noted by the SEC Chairman, the practice has an “inherent conflict of interest.”

Unfortunately for Robinhood, payment for order flow is one of its largest, and is the “way the millennial-favored stock trading app is able to provide zero-commission trading,” says CNBC. In fact, about 75% of the company’s total net revenues came from this practice.

The company even lists this issue as a risk factor in its S-1 from July 1, 2021:

“Because a majority of our revenue is transaction-based (including payment for order flow, or “PFOF”), reduced spreads in securities pricing, reduced levels of trading activity generally, changes in our business relationships with market makers and any new regulation of, or any bans on, PFOF and similar practices may result in reduced profitability, increased compliance costs and expanded potential for negative publicity.”

Cutting it off could do real damage to the HOOD stock.