In a recent interview with CNBC, Robinhood CEO Vlad Tenev staunchly defended the practice of payment for order flow (PFOF), asserting that it is "inherently here to stay" in the U.S. market. He emphasised the legality and regulation surrounding market-maker routing, dismissing concerns about its future viability.
Payment for order flow, or PFOF, involves the routing of trades through market-makers like Citadel Securities, with brokers receiving a portion of the profits in return. This practice has been instrumental in reducing trading commissions to zero, making stock investment more accessible to consumers.
During the CNBC interview, Tenev addressed the inherent conflict perceived in revenue generation through transaction-based businesses. He contended that “If I’m a business that’s selling things, and I’m generating transaction revenue, the more you use it, the more money you get. Inherently, there’s a conflict there because I make more money by getting you to transact more." The criticism has been politicised and deemed it unreasonable to argue against making revenue in a transaction-driven business model.
However, PFOF has not been without controversy, as critics argue that it creates a conflict of interest between brokers and clients. Notably, the practice is banned in the U.K., where Robinhood is set to launch in the coming days. In the U.S., the Securities and Exchange Commission considered banning PFOF due to its controversial nature but ultimately decided against it.
Critics posit that brokers may prioritise directing order flow to market makers offering PFOF arrangements over the best interests of their clients. Despite the controversy, Tenev highlighted that PFOF contributes to only a small fraction of company's revenues, with a significant portion stemming from net interest income generated from cash in user balances.
Additionally, in the second fiscal quarter, transaction-based revenues, including PFOF, experienced a 7% decrease, amounting to $193 million for the company. Tenev clarified that PFOF constitutes approximately 5% of the company's revenue, emphasising that the business has diversified into other areas such as securities lending, margin, and subscriptions.
Company’s disruptive model of low commission fees has compelled major players in the wealth management sector to follow suit by slashing their own fees to zero. This shift has resulted in some companies opting to wind up or sell to competitors. Examples include TD Ameritrade, which was acquired by Charles Schwab for $26 billion, and E-Trade, purchased by Morgan Stanley for $13 billion.
Tenev's defence of PFOF sheds light on the ongoing debate surrounding the practice, its impact on the industry, and Robinhood's efforts to navigate the complex landscape of financial regulations and consumer expectations.