When discussing the record-setting $70 million fine for its alleged technical, due-diligence and truth-telling failings that apparently served as the green light for going public, we noted that the Robinhood IPO prospectus’ “Risk Factors” chapter was likely to be on the long side, and indeed—now that the S-1 is here for all to see—it is, taking up 75 of the 281 pages. Then, our focus was on the risks inherent in the hailstorm of user litigation, regulatory ire and skeptical oversight battering the company. (Indeed, Robinhood itself sees no clear skies ahead: “We have been subject to regulatory investigations, actions and settlements and we expect to continue to be subject to such proceedings in the future….) Incredibly, however, these pale in comparison to the threat that one day soon lawmakers and/or regulators will decide to take away the source of $420 million of the $522 million Robinhood made in the first quarter: payment for order flow.
Payment for order flow critics—including the country’s top market regulator, Securities and Exchange Commission Chairman Gary Gensler —are wary of the practice. They argue that it poses a conflict of interest for brokerages, because the brokers can either collect more money for selling their customers’ order flow or pass that money on to customers in the form of price savings on their trades. Last month, Mr. Gensler said the SEC was reviewing payment for order flow, fueling speculation among some market observers that PFOF could be banned.
“The entire business model of some brokers is in the crosshairs,” said Tyler Gellasch, executive director of Healthy Markets Association, an investor trade group…. “There is no guarantee that the SEC, other regulatory authorities or legislative bodies will not adopt additional regulation or legislation relating to PFOF practices…including regulation that could substantially limit or ban such practices,” Robinhood said.
This might seem like an existential issue that would be of interest to those about to give Robinhood something between a $30 billion and $40 billion valuation. But, of course, it’s important to remember that probably somewhere between most and all of that $420 million in sweet, sweet payments for order flow came for filling orders for meme stocks and joke cryptocurrencies whose valuations themselves are completely untethered from whatever used to be consider a fundamental, and there’s no reason to assume that the newly-offered Robinhood shares—35% of which, after all, are set to be injected straight into Robinhood users’ veins—would be subject to any stricter interpretation of that word, and so it will almost certainly be fine.
Even if new regulations curtail the company’s PFOF revenue, Robinhood could find other ways to make money from its vast customer base, said Jamie Selway, chairman of retail-brokerage startup All of Us Financial Inc.
“They have 18 million relationships, which is huge,” he said, citing the company’s reported number of funded accounts. “There are other levers they could pull.”
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