The SEC has issued new regulatory threats to Robinhood

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In an S-1 filing, Robinhood stated that increased regulatory scrutiny of cryptocurrency could hinder their business model, particularly with their “payment for order flow” model.

The focus of Robinhood’s warning was payment for order flow, a method employed by brokerages like Robinhood and Charles Scwab to collect money in exchange for client trade orders. The contentious technique allows internet brokers to charge regular investors no commission by selling their orders to market makers, who then execute the trades.

“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”

Robinhood cited the Securities and Exchange Commission (SEC) in their June plan, which stated that the SEC might consider new rules in the new year to “modernize equity market structure,” which could include an overhaul of PFOF. In their amended S-1 filing, Robinhood stated:

“These laws and regulations are complex and our interpretations of them may be subject to challenge by the relevant regulators. Future regulatory developments are impossible to predict with certainty. Changes in laws and regulations, or our failure to comply with them, may negatively impact our ability to allow customers to buy, hold and sell cryptocurrencies with us in the future and may significantly and adversely affect our business.”

While PFOF was important for the onboarding of many young retail traders, the House Financial Services Committee grilled Robinhood CEO Vlad Tenev on their business strategy, specifical payment for order flow, in February of this year.

Representative Ocasio-Cortev questioned Tenev about the Robinhood business model, which allows ordinary traders to trade without paying commissions, noting:

“If removing the revenues that you make from a payment for order flow would cause the removal of free commissions, doesn’t that mean that trading on Robinhood isn’t actually free to begin with?”

In an interview, SEC Chairman Gary Gensler discussed the possibility of banning PFOF, saying that it was “on the table.”

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