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