SEC Chairman Gary Gensler said yesterday in an interview with Barron’s that a PFOF ban is on the table, and that the practice of payment for order flow could be eliminated entirely. If this comes to pass, this could be huge for the apes, and would have the effect of requiring Robinhood to change it’s entire business model.
Gensler said that a PFOF ban may be necessary because of the “inherent conflict of interest” for market makers. and his comments were tweeted out by the brilliant Unusual Whales Twitter account.
“They get the data, they get the first look, they get to match off buyers and sellers out of that order flow,” he said. “That may not be the most efficient markets for the 2020s.”Gary Gensler, SEC Chair
Although declining to say whether the SEC has uncovered specific examples of conflicts of interest where an outright PFOF ban could be appropriate in order to protect retail investors, he did allude to the fact that the SEC is actively reviewing the practice, and could indeed come up with proposals to put permanent ban on Payment for Order Flow practises.
PFOF Ban could be great step for Apes
Payment for Order Flow (PFOF) is one part of the shenanigans that apes have been shouting about for many months now, and which Gensler appears to have at least paid lip service to, even if they haven’t necessarily acted against it just yet. The SEC chair has noted that dark pool trades are currently making up about half of daily trading, as well as the internalization of trades by hedge funds and institutions, which effectively lock out retail investors from being able to participate in an open and transparent way.
“Also on the table is how do we move more of this market to transparency….Transparency benefits competition, and efficiency of markets. Transparency benefits investors.”Gary Gensler
Gensler’s interview has been met with mixed reaction by many of the memestock Apes. On the one hand, it’s great to hear the chair of the SEC saying these things, and it’s certainly true that although a ban on PFOF is unlikely to trigger the MOASS, it would at least be a step forward in moving towards a transparent and fair trading system.
Brokerage Robinhood relies on Payment for Order Flow in its current business model, with the practise making up around 80% of it’s revenue, and this is what it uses to offset the zero commission trading which it advertises itself on. Robinhood told investors in security filings that a PFOF ban is a risk factor, but at the time they downplayed whether it would happen.
“Our view internally is that we don’t expect payment for order flow to be banned”Jason Warnick, CFO of Robinhood
CFO Jason Warnick said that PFOF accounts for around 2 to 2.5 cents per $100 traded, and said that this was “not a terribly difficult revenue stream for us to replace.” But of course, that’s hardly the point is it. Payment for Order Flow creates a situation whereby the market isn’t operating on a level playing field, and essentially makes it very easy for the institutions to predict market sentiment in a way that retail investors cannot see.
Furthermore, the SEC recognises that this statement is a little misleading on the basis that these tiny slices soon add up, and last year the platform settled allegations with the SEC over how it negotiated and disclosed PFOF.
Ultimately, the proof of the pudding is in the way that the SEC handles these cases now. If the regulator does move towards a PFOF ban, that would be great news, but the Ape community clearly isn’t holding it’s breath, with loads of dismissive memes coming out over the last few days including this beauty:
Shortly after the announcement by Unusual Whales, Robinhood absolutely TANKED down over 8% on the news.
We at Apes Army will continue to watch this space, and report anything of interest which will increase your supply of bananas and chicken tendies.