The SEC is reviewing changes to share trading after an explosion of interest in meme stocks, including the use of payment for order flow

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SEC Chairman Gary Gensler.

The Securities and Exchange Commission is looking at changing rules around share trading after the day-trader frenzy around meme stocks showed equity markets may not be as efficient as they could.

Chairman Gary Gensler said Wednesday he has asked the regulator’s staff to submit recommendations on a range of market rules, including the high fees paid to Wall Street brokers for executing small-investor orders and the rise of commission-free brokerage apps.

Their recommendations will address the issue of payment for order flow, or the compensation online brokers receive when stock orders are routed to third-party firms like Virtu Financial and Citadel Securities in order to carry out the trade.

Shares in Virtu fell 7.7% after Gensler’s comments. The high-speed trader handles about one-third of individual investors’ order flow in US stocks, according to the Wall Street Journal. Virtu’s stock rallied this year alongside the meme-stock frenzy, while Citadel Securities isn’t publicly traded.

Gensler previously called out popular investing apps like Robinhood that have introduced millions of amateur investors to stocks through the lure of zero commissions. He criticized the company for encouraging the gamification of the stock market, and for not doing enough to educate its user base of the risks associated with investing.

Robinhood’s business model, which operates on a system of payment for order flow, allows it to offer so-called “commission-free trading.” But some lawmakers have called for increased examination into the potential conflict of interest it presents its users.

The SEC will look into this practice, that uses phone alerts and other notifications to get investors to trade more, Gensler said at a Piper Sandler conference in New York.

“The question is whether our equity markets are as efficient as they could be, in light of the technological changes and recent developments,” he said.

Most of these issues came to regulatory attention after day traders used social platforms like Reddit to bid up prices of heavily-shorted stocks like GameStop, fuelling an over 1,200% surge in the video-game retailer’s stock in January.

More recently, a string of so-called meme stocks including AMC, Bed Bath & Beyond, and BlackBerry saw $1.27 billion in retail investor inflows in the past two weeks. That matches the peak of GameStop’s short squeeze earlier in the year.

New SEC rules could impact the business models that online brokerages use, meaning Robinhood and its competitors would have to operate under new guidelines.

“Brokers profit when investors trade,” Gensler said. “For those brokers who have these arrangements – and not all do – higher trading volume generates more payment-for-order flow. What makes the current zero-commission brokerage environment different is that investors do not see their costs as they’re executing trades, so they may perceive them as free.”

Read More: An award-winning software analyst of nearly 20 years breaks down why these 4 beaten-down stocks are set to soar in the months ahead – including 1 with 163% upside

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I used Robinhood, WeBull, and Public for the first time. They all have their advantages, but WeBull outshines the competition with its resources for new traders.

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  • I opened brokerage accounts with three trading apps this week and compared the experience of using each.
  • Robinhood by far has the best looking app. But if you want more resources to help you make investing decisions, use WeBull.
  • Robinhood launched in 2013 and is now seeking to go public. WeBull and Public both launched in 2017.
  • See more stories on Insider’s business page.

Robinhood launched in 2013 and quickly gripped new and young investors wanting to try their hands at retail trading.

The trading app, which is seeking to go public with a valuation as high as $30 billion, had about 13 million users at the end of 2020.

But the app came under intense scrutiny from lawmakers, regulators, and customers after it halted trading of GameStop as retail traders drove up the stock price to all-time highs in January.

Some have said the app makes investing too much like a game, as others complained of market manipulation amid the GameStop frenzy.

The situation has allowed competitors to muscle in.

WeBull, the Chinese-owned brokerage that launched in 2017, said it saw a 16-fold jump in new account signups following the Robinhood backlash, Bloomberg reported at the time. Meanwhile, Public, which also launched in 2017, has doubled in size year-to-date with more than 1 million users.

These trading apps are all competing for attention from Millennial and Gen Z investors alongside more established brokerages, like TD Ameritrade, Fidelity, and others.

For this story, I downloaded each of the three apps to compare the user interface, the variety of features, security, and the educational resources, to see which one came out on top.

The bottom line? Robinhood was hands down the most enjoyable to use and interact with, but WeBull came out on top with readily available data and resources to help me improve my investing strategies.

My view as a first-time retail investor

I will start by saying I’ve never done this before. I started my professional journalism career at Bloomberg and am now the Millennial Investing reporter on the markets team at Insider. Those roles come with strict rules on what I can and can’t do in terms of investing.

For example, I write a lot about meme stocks like GameStop and AMC. If I were to invest in one, that would be a conflict of interest and would land me in hot water with my employer. Besides contributing to a 401(k), I’ve stayed away from any other investing.

To open accounts with each of the apps, I had to answer a lengthy list of questions, from my investment experience to a lot of personal identifying information, and then input my banking information. This experience is standard across all services.

Though I did not claim the offer, all of the apps I tested award users one free stock as a perk of signing up.

Also, importantly, all of these services are commission-free. This is the case for both stocks and crypto on Robinhood and WeBull, while Public does not offer crypto trading at this time.

Read more: BANK OF AMERICA: Buy these 36 dirt-cheap small- and mid-cap stocks that will soar as the global economy reopens and inflation heats up – including 5 expected to surge at least 60%

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Screenshot from Public app

I see why Robinhood has been described as “gamifying” investing. The app is well-designed and exciting.

My retail investing journey began with Robinhood. I got the go-ahead to transfer exactly $1 to my new brokerage account to invest in an exchange-traded fund. I chose the Vanguard S&P 500 ETF, which trades under the ticker VOO.

With $1 in buying power, I received .002602 shares, the app said. I swiped up to submit the purchase. It said my order was completed and showed me a summary.

When I clicked “Done,” a full-screen graphic appeared saying, “Congrats on making your first trade, Natasha!”

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Screenshot from Robinhood app

As someone who writes about markets for a living, this was extremely fun. If I’d had more than $1, I would have clicked the shiny green button on the bottom that read, “Continue your journey” to buy more.

I started to understand how young people could become addicted to an investing app.

Public made the buying experience just as easy. Instead of the bright white-and-green color scheme on Robinhood, Public has a sleek black-blue-and-white design.

I easily found the Vanguard ETF, input my $1 of buying power, and clicked “confirm.” No confetti, but it was straightforward and easy.

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Screenshot from Public app

WeBull was more of a challenge. I transferred my $1 from my bank account only to discover the app doesn’t offer fractional trading, meaning I had to buy a whole share, which would have cost $386.91 as of 2:45 p.m. on Friday.

The discovery was a let down. I would either have to find an ETF trading at $1, which does not exist, or transfer more money for something more expensive.

I decided on a single share of the Financial Select Sector SPDR ETF, trading under the ticker symbol XLF, for $37.54.

After transferring more funds, I hit the blue “trade” button on the ETF’s main page, input the quantity as 1, and hit “confirm.” It brought up a receipt page that read “working” and would allow me to cancel or modify my order in the meantime. Again no fireworks, but a relatively simple process.

WeBull has everything a young investor would need – except fractional trading and a fun user interface

If you overlook the lack of fractional trading, which can be a great way for investors to own otherwise prohibitively expensive stocks, WeBull felt like the most serious investing app. Here’s why.

First of all, it had the most security features. I opted to set an unlock pattern for each time I open the app. On top of that, when I decide to go into my brokerage account within the app, I have to enter a six-digit pin.

It felt like bank-level security, which is something I found important out of a broker that has all of my personal information and bank account details.

Robinhood and Public have security features, too, just not as many. Robinhood requires my phone passcode each time I open the app. On Public, I opted to turn on the face-ID feature for more security.

WeBull also provided the most market data.

Though the deluge of data meant the app wasn’t as sleek as Robinhood, it also meant I had more access to important information before investing.

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That’s not to say Robinhood and Public don’t have market data. They do (on Robinhood investors can pay $5 for a subscription to market research and level 2 data), but neither app has near the amount of information WeBull provides up front.

In terms of educating young or new investors, WeBull also wins. The app regularly sent me messages with how-tos on investing and explainers on topics like initial public offerings.

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Screenshot from WeBull.

There wasn’t much for educational resources within the Robinhood app. Public offered some. All three gave access to relevant news articles.

WeBull also had a social media feature, where users can share their views and investments.

Public, though, has a much more visible social aspect, and markets that as a selling point. Its slogan is “Public makes the stock market social,” and it recently launched a live audio feature, similar to that of the Clubhouse app.

Among the apps, investors have to choose among a sleek and exciting platform with Robinhood, a less sleek yet more informational app in WeBull, or a social-media driven platform in Public.

Overall, my experience would lead me to choose WeBull if I was in the market for a trading and investment platform.

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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.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

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

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  • 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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