Payment for order flow models “undermine the relationship between the broker and their client,” Duke Law professor tells Congress

Vlad Tenev, co-founder and co-CEO of investing app Robinhood.
Vlad Tenev, co-founder and co-CEO of investing app Robinhood.

  • Duke Law Professor Gina-Gail S. Fletcher appeared in a hearing with the Senate Committee on Banking, Housing, and Urban Affairs on Tuesday.
  • In the hearing the professor said payment for order flow models pit brokers profits against their clients’.
  • Other experts on the panel even called for the payment for order flow model to be banned altogether.
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In a Tuesday hearing held by the United States Senate Committee on Banking, Housing, and Urban Affairs, Senators sat down with five experts to discuss “Who Wins on Wall Street? GameStop, Robinhood, and the State of Retail Investing.”

In the hearing, Duke Law Professor Gina-Gail S. Fletcher was asked by Sen. Sherrod Brown (D-OH) about stock brokerages using the payment for order flow business model.

Payment for order flow (PFOF) entails brokerages selling customers’ buy and sell orders to market-makers like Citadel Securities, Virtu, or Two Sigma. This allows the firms to generate revenue without charging commissions for trades.

When asked about the PFOF model, Duke law professor Gina Fletcher said that payment for order flow models “undermine the relationship between the broker and their client.”

The testimony was a rebuke of brokers like Robinhood, which rely on payment for order flow for the majority of their revenue.

Fletcher said that payment for order flow “pits the broker’s primary revenue source directly against the clients to whom they owe a duty of best execution.”

She also noted that it allows brokers to “say that they are offering zero-commission trading to retail investors when commissions are being subsidized by wholesalers.”

Professor Fletcher continued: “Under the payment for order flow model, brokers are incentivized to put their own profit-seeking interest above their clients’ in deciding where to route orders.”

Other experts on the panel included Rachel J. Robasciotti, the founder & CEO of Adasina Social Capital, who said that payment for order flow allows brokerages to profit while they give clients trading execution prices that are well below market value.

Robasciotti argued that the practice should be banned altogether due to the lack of disclosure adding, “if you don’t see what you are paying you are probably paying more than you would be comfortable with.”

Other experts weren’t as quick to call for a ban on the practice, but the group all agreed that the Securities and Exchange Commission should look into the payment for order flow model to decide if it should be allowed to continue.

To find out if a broker is getting paid for order flow, check out this article to learn more.

Read the original article on Business Insider

Robinhood pays $65 million to settle SEC probe over misleading communications with customers

robinhood
  • Robinhood agreed to pay $65 million to settle with the Securities and Exchange Commission over charges that the brokerage misled clients on its revenue from trades and the quality of its service.
  • The SEC alleged Robinhood made “misleading statements and omissions” about how it made money with market-makers. Robinhood, like other brokerages, sells its orders to high-speed trading firms for execution.
  • While Robinhood marketed its trades as commission-free and matching or exceeding its peers in quality, the brokerage provided inferior trade prices that cost clients tens of millions of dollars, according to a Thursday SEC press release.
  • The settlement relates to practices “that do not reflect Robinhood today,” Dan Gallagher, the brokerage’s chief legal officer, said in an emailed statement.
  • Visit the Business Insider homepage for more stories.

Robinhood agreed to pay $65 million to settle Securities and Exchange Commission charges that allege the discount brokerage misled customers on the quality of its trading service.

The regulator argued Robinhood made “misleading statements and omissions” about how it made money with high-speed trading companies, according to a Thursday press release. Like other brokerages, Robinhood sells its orders to trading firms for execution in a process known as “payment for order flow”.

The SEC’s order alleges the brokerage routinely provided inferior trade prices, even as¬†Robinhood marketed its trades as commission-free and executed with quality that matched or beat peers. The second-rate prices have cost clients a total of $34.1 million even after accounting for the lack of commission fees, according to the SEC.¬†

Read more: Buy these 26 stocks poised to surge as China starts to dominate the electric-vehicle landscape, UBS says

“Robinhood provided misleading information to customers about the true costs of choosing to trade with the firm,” Stephanie Avakian, director of the SEC’s Enforcement Division, said in a statement. “Brokerage firms cannot mislead customers about order execution quality.”

The settlement ends a probe that examined Robinhood’s omission of order-flow revenue on its website from 2015 to 2018. Robinhood resolved the probe without admitting or denying the SEC’s charges.

The settlement relates to practices “that do not reflect Robinhood today,” Dan Gallagher, the brokerage’s chief legal officer, said in an emailed statement.

“We recognize the responsibility that comes with having helped millions of investors make their first investments, and we’re committed to continuing to evolve Robinhood as we grow to meet our customers’ needs,” he added.

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Read the original article on Business Insider