It’s no secret that Gary Gensler wants to make life miserable for the people of Robinhood, the commission-free brokerage firm that has become a sensation among the growing ranks of day-to-day amateur traders.
Less well known is what I feel about the people of Robinhood: they plan to make life pretty miserable for Gensler.
Of course, it’s never a smart thing to struggle with your main regulator; that’s why most Wall Street businesses simply set up. Gensler, as president of the SEC, can order any research and examination of Robinhood’s sometimes controversial business practices, which are designed to make stock trading fun.
But Robinhood is not fighting. Also, people there know what Gensler has recently proposed (a possible ban on something known as order flow payment or PFOF) has existential ramifications for the brokerage firm. The company earns most of its money through practice. Its stock was withdrawn last week in Gensler’s comments to Barron’s financial publication about a possible ban.
That’s a good enough reason for the company to come up with plans for a strong attack if Gensler presses the PFOF ban button. Another reason is the absolute idiocy of Gensler’s goal against PFOF and Robinhood itself.
Robinhood needs to regulate like anything else on Wall Street, but we’re much better with it than without it. Investors can trade freely; they can even buy fractional shares. Yes, the firm has pushed the envelope with tricks (penny free shares), but the tricks are part of Wall Street. Also, why allocate your money to some commission-based stock market fund received by Blackrock from Larry Fink when you can buy yours?
And Robinhood would not exist without PFOF, which allows average people to negotiate at a discount or, in the case of Robinhood, without commissions. Discount brokers make money by selling their clients ’buy and sell orders to other Wall Street companies, so-called market makers like Citadel Securities and Virtu Financial, which coincide with transactions that split fractions of a penny between spreads. of buying and selling stock.
This is where Gensler does his best impersonation of conspiracy theorist Oliver Stone on practice and Robinhood itself. Suggesting that, by having all this order flow and all their computerized know-how, Citadel and Virtu have an unfair information advantage for their own business.
By running these businesses at Citadel and Virtu, Robinhood is encouraged to ignore any scam due to the commissions it receives. Companies can hide all this supposedly nefarious business activity in various “dark pools” or private markets that exist all over Wall Street.
Or so says Gensler. However, it does not offer any evidence of PFOF fraud. It has not shown that market makers are constantly fooling customers of discount brokers by not giving them the best price on their “dark pools,” as they are legally required to do. He wants these operations to target traditional stock exchanges, but he also offers no evidence that shipping the entire order flow to the NYSE or the Nasdaq is better for the consumer. And it doesn’t say why we should exploit a system that allows average people to trade for free.
He then escaped years of market reforms. Years ago, regulators did not want this entire flow of trading orders to go to the Nasdaq or the NYSE because of various scandals and because competition in market creation entails lower costs for individual traders.
Perhaps the most absurd of Gensler’s problem on this subject is that this former Goldman Sachs banker and MIT professor of finance is now channeling the conspiracy theory circulating among those annoying meme investors running around the Internet, blaming the pools. dark and Citadel of any negative impression on meme stocks. like AMC Entertainment, the theatrical chain that loses money.
This ball of stupidity is the reason Robinhood is prepared to fight and fight hard, first pressing Congress (already managed to water down a bill coming out of the House Financial Services Committee seeking a similar ban on the PFOF). Look for Robinhood pressure groups to turn to GOP members in Congress to audition Gensler (especially if the GOP takes Congress) on PFOF, as well as its various regulatory crazes that have nothing to do with the protection of shareholders.
Gensler is likely to be in court as well. Robinhood or any number of discount brokers talk about suing the SEC and Gensler before the DC Circuit that has pushed the SEC extension forward.
Again, I don’t remember a brokerage firm trying to go to war with the best Wall Street cops. But if not repeated, Robinhood is looking into the abyss, and that’s why this fight could get ugly.