Shares of online trading platform Robinhood (NASDAQ:HOOD) fell as much as 7% after U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler said that banning payment for order flow is "on the table."
Gensler said in a media interview that payment for order flow — the back-end payment brokerages receive for directing clients’ trades to market makers — has "an inherent conflict of interest."
Payment for order flow is one of Robinhood’s largest revenue generators and the way the stock trading app can provide zero-commission trading fees. Payment for order flow is a controversial practice that has garnered increasing attention from regulators and politicians.
Gensler has previously said that an outright ban of payment for order flow is among several options the Wall Street regulator is considering implementing. The SEC has said it will also consider clearer and more rigorous brokerage disclosures as a possible alternative.
Following an epic short squeeze in GameStop’s stock in January that forced Robinhood to limit trading on certain securities, Robinhood Chief Executive Officer Vlad Tenev was forced to testify to the U.S. House Financial Services Committee.
Legislators in Washington, D.C. have criticized payment for order flow for the conflict it has with market makers such as Citadel Securities.
Gensler’s comments come after the SEC said it is stepping up its inquiry into so-called gamification and behavioral prompts used by online brokerages and investment advisors to prod people to trade more stocks and other securities.
Robinhood went public last month. After falling during the first few days of trading, the company had a meme stock moment when it rallied 50% amid retail investor interest before declining again. The stock is up more than 20% in August.
