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 doesn’t consider that the payment for order flow (PFOF) model of market-maker routing that the corporate incorporates within the U.S. is under threat.
That is despite 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’s “inherently here to remain.” PFOF is the practice of routing trades through market-makers like Citadel Securities in return for a slice of the profits.
“If I’m a business that is selling things, and I’m generating transaction revenue, the more you employ it, the more cash you get. Inherently, there is a conflict there because I earn more money by getting you to transact more,” Tenev told CNBC in an interview.
“I feel it is important to not take the child out with the bathwater. What does that mean, you mustn’t make revenue on a transaction-based business? That is unreasonable. And I feel the purpose has been politicised to a point.”
PFOF is viewed as controversial due to the perceived conflict of interest it creates between the broker and clients.
Critics say that brokers have an incentive to direct order flow to market makers offering PFOF arrangements over the interests of their clients.
PFOF is banned within the U.K., where Robinhood announced plans to launch Thursday.
The U.S. Securities and Exchange Commission had checked out banning PFOF in light of concerns surrounding the practice, but opted to not, while the European Union has imposed a blanket ban on PFOF.
PFOF accounts for a small chunk of Robinhood’s revenues today, Tenev said, while much of its income today comes from net interest income which is generated from money in user balances.
Transaction-based revenues, which incorporates PFOF, decreased 7% in Robinhood’s second fiscal quarter to $193 million.
“Should you take a look at equities, PFOF particularly, it’s about 5%. of our revenue, so a much smaller component of the general pie. And we have diversified the business quite a bit,” including other areas like securities lending, margin, and subscriptions.
Robinhood’s race to the underside on commission fees has forced many major players within the wealth management world to slash their very own fees to zero, in turn causing some corporations to wind up or sell as much as competitors.
TD Ameritrade was sold to Charles Schwab for $26 billion, while Morgan Stanley bought E-Trade for $13 billion.
“Within the U.S., Robinhood got here along and really modified the industry,” Tenev said. “The discount brokers which can be charging commissions essentially ceased to exist.”
“They’d to drop commissions to zero. A number of them couldn’t survive that transition as standalone corporations and ended up consolidating. And we’re still living through the the final result of that.”
