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Money Stuff: Does Robinhood Need Payment for Order Flow?

Matt Levine
Money Stuff
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What happens if the SEC bans payment for order flow?

  • Robinhood gets about 80% of its revenue from payment for order flow because it doesn't charge a commission.
  • If PFOF is banned, Robinhood will start charging a fee and the era of retail trading will ultimately come to an end.
  • Robinhood's slid 3.3% after SEC chairman Gary Gensler said banning PFOF was "on the table."

Robinhood could survive this potential ban by "internalizing" trades.

  • For instance,
    • Robinhood customers can buy the stock at the offer for $58.25 or could sell it at the bid for $58.00.
    • Its customers could buy at $58.15, saving 10 cents, while its other customers could sell at $58.10, saving 10 cents.
    • Robinhood could then charge 5 cents for making this happen.
  • 4 notes about this method:
    • Robinhood has said that it will do this.
    • PFOF is banned in other countries, and this is how commission-free trading works there.
    • This is the same structure as PFOF, just without the explicit payments, so it doesn't solve the issues some people see in PFOF.
    • The effect of a potential ban is overstated because 41% of Robinhood's PFOF revenue comes from crypto, which the SEC has little control over.

The Theranos Trial

  • Elizabeth Holmes, the founder of Theranos (a blood-testing start-up), is set to stand for trial for fraud after lying about the effectiveness of their product and raising over $700 million.
  • 3 Problems with Holme's defense:
    • For prosecutors, unlike investors, pitching something crazy is simply considered a lie.
    • While legal experts say Holmes needs jurors well-versed in the startup scene, prosecutors will most likely disallow a jury of her peers.
    • Holme's jury will include patients who tested Theranos' failed product.

Muni Front-Running

  • Crews & Associates, an Arkansas-based broker advising municipalities on issuing bonds, bought bonds of Ohio County while advising them to buy back bonds to reduce interest expense.
    • They made a small profit of around $60,000 on $6 million of bonds.
  • While Crews technically disclosed to Ohio County that they could potentially hold a conflict of interest, the SEC thinks they didn't say it explicitly enough to warn Ohio County that they were going to overpay for the bonds.

Insider Trading Case Against Beth Mueller

  • Beth Mueller worked at a public company named Peak Resorts, which was bought by Vail Resorts.
  • Just before being acquired, Mueller advised her friend, Chasins, to buy Peak Resort stocks, which resulted in a 113% gain.
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