Robinhood CEO says payment for order flow is ‘here to stay’

Robinhood CEO Vlad Tenev says he would not consider that the fee for order move (PFOF) mannequin of market-maker routing that the corporate incorporates within the U.S. is below risk.

That is regardless of calls from notable shopper buying and selling advocates and regulators for a ban on the observe.

Talking with CNBC, Tenev defended the observe of PFOF, saying that it is “inherently right here to remain.” PFOF is the observe of routing trades via market-makers like Citadel Securities in return for a slice of the income.

“If I am a enterprise that is promoting issues, and I am producing transaction income, the extra you employ it, the more cash you get. Inherently, there is a battle there as a result of I make more cash by getting you to transact extra,” Tenev instructed CNBC in an interview.

“I feel it is essential to not take the child out with the bathwater. What does that imply, you should not make income on a transaction-based enterprise? That is unreasonable. And I feel the purpose has been politicised to a point.”

PFOF is seen as controversial due to the perceived battle of curiosity it creates between the dealer and shoppers.

Critics say that brokers have an incentive to direct order move to market makers providing PFOF preparations over the pursuits of their shoppers.

PFOF is banned within the U.Okay., the place Robinhood introduced plans to launch Thursday.

The U.S. Securities and Change Fee had checked out banning PFOF in mild of issues surrounding the observe, however opted to not, whereas the European Union has imposed a blanket ban on PFOF.

PFOF accounts for a small chunk of Robinhood’s revenues right this moment, Tenev stated, whereas a lot of its earnings right this moment comes from web curiosity earnings which is generated from money in consumer balances.

Transaction-based revenues, which incorporates PFOF, decreased 7% in Robinhood’s second fiscal quarter to $193 million.

“In the event you take a look at equities, PFOF particularly, it is about 5%. of our income, so a a lot smaller element of the general pie. And we have diversified the enterprise fairly a bit,” together with different areas like securities lending, margin, and subscriptions.

Robinhood’s race to the underside on fee charges has pressured many main gamers within the wealth administration world to slash their very own charges to zero, in flip inflicting some firms to wind up or promote as much as rivals.

TD Ameritrade was offered to Charles Schwab for $26 billion, whereas Morgan Stanley purchased E-Commerce for $13 billion.

“Within the U.S., Robinhood got here alongside and actually modified the business,” Tenev stated. “The low cost brokers which might be charging commissions basically ceased to exist.”

“They needed to drop commissions to zero. A whole lot of them could not survive that transition as standalone firms and ended up consolidating. And we’re nonetheless dwelling via the the top results of that.”