Robinhood: SEC Chairman Signals Strict Restrictions Ahead for Order Flow Payments

In a speech he gave last week, US SEC Chairman Gary Gensler continued his virulent attacks on the popular practice of payment-for-order-flow (PFOF) online brokerage and, more importantly, signaled that it plans to make it harder for companies like Robinhood Markets, Inc. (NASDAQ: HOOD) to continue to rely on the commercial routing methodology which accounts for well over half of its revenue.

Under the PFOF, an online brokerage firm directs orders from clients – mostly retail investors – to market makers in exchange for a fee. The PFOF technique, which allows Robinhood to charge no commission, is ridiculed by full-service (commission-charging) brokers who argue that the practice results in a less favorable transaction price for the online broker’s clients.

Mr. Gensler asked his staff at the SEC “to take a broad, cross-cutting view of how we could update our rules and make our stock markets more efficient, especially for retail investors.” In turn, this fall the SEC could require online brokers to send individual customer orders to auctions, where trading companies (also called market makers or wholesalers) compete to fill the order at the best price. , instead of sending orders to a preferred marketplace. manufacturer who undertakes to pay him the most costs. A market maker buys and sells stocks throughout the day and profits from the difference between the buying and selling prices of the securities.

Trading firms such as Citadel Securities and Virtu Financial, which pay online brokers a fee for order flow instead of competing with each other, can generate more profit by executing retail orders internally than by doing so. doing on public exchanges.

It is almost certain that online brokers who engage in PFOF and market makers who reap outsized profits as beneficiaries of this activity will fight to modify or at least delay Mr. Gensler’s upcoming proposal. Given the money involved and the financial strength of the companies involved, this should come as no surprise. After all, this rule would represent perhaps the biggest change in US market rules in a decade or more.

Given this uncertainty as well as the market’s new lack of tolerance for (formerly) high-growth and losing companies, Robinhood shares fell to US$7.81, down more than 90% from the highs. observed last August. Interestingly, Robinhood’s market capitalization has dropped to around $6.5 billion, only $500 million more than its net cash (as of March 31, 2022) of around $6 billion.

(in thousands of US dollars, unless otherwise indicated) 1Q 2021 4th quarter 2021 3rd quarter 2021 2nd quarter 2021
Cumulative funded accounts (millions) 22.8 22.7 22.4 22.5
Sequential growth 0.4% 1.3% -0.4% 25.0%
Monthly active users (millions) 15.9 17.3 18.9 21.3
Sequential growth -8.1% -8.5% -11.3% 20.3%
Assets under custody (billions of US dollars):
Shares $69 $72 $69 $73
Choice $1 $2 $1 $2
Cryptocurrencies $20 $22 $22 $23
Net cash held by users $4 $2 $3 $4
Assets under custody (in billions of US dollars) $93 $98 $95 $102
Sequential growth -5.1% 3.3% -6.9% 25.9%
Average account balance (USD) $4,083 $4,322 $4,241 $4,533
Sequential growth -5.5% 1.9% -6.4% 0.7%
Average revenue per user (USD) $53 $64 $65 $112
Sequential growth -17.2% -1.5% -42.0% -18.2%
Income from PFOF options $127,000 $163,000 $164,000 $164,604
Cryptocurrency PFOF type revenue $54,000 $48,000 $51,000 $233,103
PFOF Equity Income $36,000 $52,000 $50,000 $52,012
Other PFOF income $1,000 $1,000 $2,000 $1,448
PFOF or PFOF-like income $218,000 $264,000 $267,000 $451,167
All other income $81,000 $99,000 $98,000 $114,166
Net revenue $299,000 $362,713 $365,000 $565,333
Sequential growth -17.6% -0.6% -35.4% 8.3%
Adjusted EBITDA ($143,000) ($86,844) ($83,999) $90,173
Cash $6,191,000 $6,253,477 $6,166,705 $5,077,752
Debt – end of period $203,000 $151,000 $0 $7,369,522
Shares outstanding (millions) 869.8 863.9 835.7 225.8
PFOF = payment for order flow.

Robinhood has a huge operating cash deficit of negative US$224 million for the twelve months ended March 31, 2022. Further, it is conceivable that this year-over-year deficit could approximately double when the company releases its results for Q2 2022. Without a clear path to profitability – especially given potential SEC initiatives to be announced in a few months – Robinhood’s market capitalization could fall well below the net cash on its balance sheet.

Robinhood Markets, Inc. last traded at US$7.19 on NASDAQ.


Information for this briefing was found via Edgar and the sources mentioned. The author has no security or affiliation related to the organizations discussed. Not a buy or sell recommendation. Always do additional research and consult a professional before purchasing a title. The author holds no license.

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