Shares of retail brokerage Robinhood Markets Inc and market maker Virtu Financial (VIRT.O) jumped following a media report that the US Securities and Exchange Commission (SEC) will stop short of banning payment-for-order-flow (PFOF).
The SEC may still enact other changes that make the practice less profitable, Bloomberg News reported on Thursday, citing people familiar with the matter. The regulator had mulled over the controversial practice for months that critics believe creates conflicts of interest. (https://bit.ly/3LwinJn)
Retail brokers route most customer orders via wholesale brokers than exchanges, as wholesalers generally offer a slightly better price. Most retail brokers also accept rebates, or payments, from wholesalers in lieu of orders.
Shares of Robinhood Markets Inc, which makes around 75 per cent of its revenue from PFOF, climbed 5 per cent, while Virtu Financial (VIRT.O) added 9 per cent.
PFOF drew new scrutiny last year when an army of retail investors went on a buying spree of “meme stocks” like GameStop (GME.N) and AMC (AMC.N), squeezing hedge funds that had shorted the shares.
Many investors had purchased the shares using commission-free brokers like Robinhood that accept PFOF from a few powerful market-makers.
Britain, Canada, and Australia have already banned PFOF, while SEC Chairman Gary Gensler had suggested in August that the regulator could go that route.
Chair Gensler said in his recent Congressional testimony that he believes it’s appropriate to look at ways to freshen up the SEC’s rules to make equity markets fair, efficient, and competitive as possible for investors, particularly for retail investors, said an SEC spokesperson.
To that end, recommendations about best execution, fees and rebates, payment for order flow and order-by-order competition are few of the things being considered, the spokesperson added.