Jun 8, 2022
The SEC is set to unveil major changes on PFOF.
These changes could see the company change its business model.
The Robinhood (NASDAQ: HOOD) stock price is hovering near its all-time low ahead of an important statement by Gary Gensler of the SEC. The stock is trading at $8.75, which is close to its all-time low of $7.87. It has crashed from an all-time high of $85, bringing its total market cap to about $7.86 billion.
Payment for Order Flow
Robinhood is a disruptor that changed the trading and investing industry. It is a platform that enables people to buy and sell financial assets like stocks and exchange-traded funds (ETFs) without paying a fee.
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Robinhood makes its money through what is known as Payment for Order Flow (PFOF). This is a complex process where the company routes trades through market-makers like Citadel and Virtu Finance.
These giant companies then pay it for every trade that the company routes through them. It can be a lucrative deal considering that Robinhood made over $1.8 billion in revenue in 2021.
Now, SEC’s Gary Gensler is set to announce a new rule that could push Robinhood to change its business model. According to the NYT, the SEC will seek to change how orders are executed.
As such, instead of going through market-makers, stocks will go through auctions in exchanges like the NYSE and the Nasdaq. The SEC believes that using this approach will serve investors by giving them the best available price.
If this is the route, companies like Robinhood will be forced to change their business model by introducing new commissions. At a time when many are grappling with inflation, such a rule change will not be received well by investors.
At the same time, they will hurt companies like Virtu and Citadel that make most of their money in this model. This explains why the Virtu Financial stock price has crashed by 30% in the past three months.
Ribonhood will be hurt more than other brokers like Schwab and TD Ameritrade since these companies have other sources of revenue.
Robinhood stock price forecast
The HOOD stock price has been in a strong bearish trend in the past few months as demand for the company and trading, in general, has evaporated. The stock is even trading near its all-time low. It remains below the 25-day and 50-day moving averages and the important support level at $10.
Therefore, there is a likelihood that the stock will continue falling as bears target the next key support level at $7.
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