Source: dennizn / Shutterstock.com
Although much of the market was in the red this morning, stocks Robin Hood (NASDAQ:HOOD) had some points in the green. So what exactly is going on? According to a Bloomberg report, the Securities and Exchange Commission (SEC) is willing to consider allowing Robinhood to continue to accept payments for order flow or PFOF. This development is positive for HOOD stock because Robinhood’s business model is heavily dependent on PFOF.
There is no way to confirm or deny what is in the Bloomberg report immediately. But if we take the rumors seriously, the SEC softening its stance on PFOF would give Robinhood and its investors a much-needed opportunity.
Here’s what the buzz is all about. Robinhood can continue to operate as a commission-free broker because of PFOF. When Robinhood users place an order, Robinhood routes those buy and sell orders to market makers. These market makers essentially play the role of intermediaries between buyers and sellers so that trading can take place.
The market operator pockets the difference between the offer price and the sale price of the stock. For a large number of orders, this can add up to millions or billions of dollars. So, market makers are happy to pay Robinhood to send them a stream of orders; both sides profit richly from this agreement.
However, SEC Chairman Gary Gensler criticized the PFOF. He wondered whether it helps or hinders achieving the best possible execution price for clients’ buy and sell orders.
A change in the SEC’s position could boost HOOD shares
The Bloomberg The report suggested that the SEC could still adopt regulations that would make PFOF’s business practices less profitable. Still, this would be less stringent than a complete ban on PFOFs.
Investors should continue to monitor this situation for further developments. A definitive statement by the SEC that it will not ban PFOFs would be a big step forward. This would have ripple effects throughout the trading world and would no doubt put Robinhood shareholders in a more hopeful mood.
We could certainly use some fuel for hope now that HOOD shares have fallen to $10 and are moving above $18 after the start of 2022. Today’s price action is promising, however, with shares jumping 2% to 3% this morning.
So, stay tuned, because US regulators might actually give Robinhood a break. Some investors and many Robinhood customers seem to be counting on it.
As of the date of publication, David Moadel did not hold (directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer and are the subject of InvestorPlace.com Publishing Guidelines.