Vlad Tenev, CEO of Robinhood, expressed confidence in the sustainability of the payment for order flow (PFOF) model in the U.S., despite calls for a ban from consumer trading advocates and regulators. PFOF involves routing trades through market-makers like Citadel Securities in exchange for a share of the profits.
Tenev defended the practice, stating that it’s “inherently here to stay.” He emphasized that taking revenue from transaction-based businesses is reasonable and cautioned against politicizing the issue. PFOF is considered controversial due to the perceived conflict of interest it creates between brokers and clients. Critics argue that brokers have an incentive to prioritize market makers offering PFOF arrangements over client interests.
While the U.S. Securities and Exchange Commission considered banning PFOF, it ultimately decided against it. The European Union, however, has implemented a blanket ban on PFOF, and the practice is prohibited in the U.K., where Robinhood recently launched. Tenev acknowledged that PFOF constitutes a small portion of Robinhood’s revenues, with net interest income, generated from cash in user balances, being a significant contributor.
Transaction-based revenues, including PFOF, decreased 7% in Robinhood’s second fiscal quarter to $193 million. Tenev highlighted the company’s business diversification into areas such as securities lending, margin, and subscriptions. Robinhood’s move to zero commission fees has disrupted the wealth management industry, prompting competitors to follow suit.
The shift forced major players like TD Ameritrade and E-Trade to be acquired by Charles Schwab and Morgan Stanley, respectively. Tenev characterized Robinhood’s impact on the industry, noting the elimination of commissions and the consolidation of discount brokers. He emphasized that the industry is still witnessing the consequences of these changes.
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