Robinhood stock sold off Monday after SEC Chairman Gary Gensler said banning payment for trades is an option. Earlier, Robinhood (HOOD) came under pressure on reports that PayPal (PYPL) could catch up with rival Square (SQ) by offering a stock-trading platform.
The top stock market regulator told Barron’s that a ban on payment for order flow in “on the table.”
Because Robinhood doesn’t charge its users fees for trades, it generates revenue by directing trades to certain market makers in return for a portion of the profits.
Gensler told Barron’s the practice has “an inherent conflict of interest,” noting that SEC staff could come out with proposals in the coming months.
“They get the data, they get the first look, they get to match off buyers and sellers out of that order flow. That may not be the most efficient markets for the 2020s.”
Gensler added: “I’m raising this because it’s on the table. This is very clear.”
Payments giant PayPal plans to let users trade individual stocks, sources told CNBC. To offer stock trading, PayPal could partner with or buy an existing broker-dealer as part of its expansion, CNBC said.
Sources said PayPal has already had talks with potential partners. Brokerage industry veteran Rich Hagen, co-founder of online broker TradeKing, has joined PayPal, the report pointed out.
Last year, PayPal launched cryptocurrency trading, but it lags Square, which already offers both stock and crypto trading through the Square Cash App.
Stock and cryptocurrency trading drives engagement and revenue per user for Square, its management has said. Robinhood, which popularized zero-fee stock trading and came public this summer, exemplifies that potential. It has seen eye-popping growth, with revenue doubling from a year ago in its latest quarter.
But PayPal could represent formidable competition. The payments firm has more than 400 million users across the world. Robinhood has 22.5 million users. And PayPal isn’t saddled with the series of black eyes that have hurt Robinhood’s image in the past year, including outages during the meme-stocks frenzy.
Robinhood stock fell 6.9% to close at 43.64 on the stock market today but closed off session lows after diving more than 8% earlier. Robinhood stock is well off highs with no entry for now. On Monday, Robinhood said it would release more shares for overallotments from its IPO.
Stock trading has seen a retail boom, due in part to the pandemic. Millions of people, stuck at home in front of computers and screens, entered the stock market for the first time.
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