Vlad Tenev, co-founder and CEO of Robinhood, rings the opening bell on the Nasdaq on July 29, 2021.
Source: The Nasdaq
Robinhood CEO Vlad Tenev says he would not consider that the payment for order stream (PFOF) mannequin of market-maker routing that the corporate incorporates within the U.S. is beneath menace.
That’s regardless of calls from notable consumer trading advocates and regulators for a ban on the practice.
Speaking with CNBC, Tenev defended the practice of PFOF, saying that it is “inherently right here to keep.” He was referring to PFOF because it exists within the United States, the place the practice is authorized and controlled.
PFOF is the practice of routing trades via market-makers like Citadel Securities in return for a slice of the income. The phenomenon has helped buying and selling corporations like Robinhood drive commissions down to zero, making it cheaper usually for shoppers to spend money on shares.
“If I’m a enterprise that is promoting issues, and I’m producing transaction income, the extra you employ it, the extra money you get. Inherently, there is a battle there as a result of I earn more money by getting you to transact extra,” Tenev advised CNBC in an interview.
“I feel it is vital not to take the newborn out with the bathwater. What does that imply, you should not make income on a transaction-based enterprise? That’s 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 stream to market makers providing PFOF preparations over the pursuits of their shoppers.
PFOF is banned within the U.Ok., the place Robinhood announced plans to launch Thursday.
The U.S. Securities and Exchange Commission had checked out banning PFOF in gentle of considerations surrounding the practice, however opted not to, whereas the European Union has imposed a blanket ban on PFOF.
PFOF accounts for a small chunk of Robinhood’s revenues at this time, Tenev stated, whereas a lot of its earnings at this time comes from web curiosity earnings which is generated from money in person balances.
Transaction-based revenues, which incorporates PFOF, decreased 7% in Robinhood’s second fiscal quarter to $193 million.
“If 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 corporations to wind up or promote up to rivals.
TD Ameritrade was sold to Charles Schwab for $26 billion, whereas Morgan Stanley bought E-Trade for $13 billion.
“In the U.S., Robinhood got here alongside and actually modified the trade,” Tenev stated. “The low cost brokers which might be charging commissions primarily ceased to exist.”
“They had to drop commissions to zero. A whole lot of them could not survive that transition as standalone corporations and ended up consolidating. And we’re nonetheless dwelling via the the top results of that.”