Even as much of the market was in the red this morning, shares of Robinhood (NASDAQ:HOOD) were a couple of points in the green. So, what’s going on exactly? According to a Bloomberg report, the Securities and Exchange Commission (SEC) is willing to consider allowing Robinhood to continue accepting payment for order flow or PFOF. This development is having a positive impact on HOOD stock because Robinhood’s business model depends heavily on PFOF.
There’s no way to confirm or deny what’s in the Bloomberg report right now. However, if we take the rumor at face value, the SEC softening its stance toward PFOF would give Robinhood and its investors a much-needed shot in the arm.
Here’s what all the hubbub is about. Robinhood can continue to operate as a commission-free broker because of PFOF. When Robinhood’s users place an order, Robinhood routes these buy and sell orders to market makers. These market makers basically play the role of matchmakers between the buyers and sellers so the trades can take place.
The market maker pockets the difference between a stock’s bid price and ask price. Over a large number of orders, this can add up to millions or billions of dollars. So, the market makers are happy to pay Robinhood to send them order flow; both parties are profiting handsomely from this arrangement.
However, SEC Chairman Gary Gensler has criticized PFOF. He questioned whether it helps or hinders getting the best possible execution price for the customers’ buy and sell orders.
A Change in the SEC’s Stance Could Boost HOOD Stock
The Bloomberg report suggested that the SEC could still enact regulations that would make the PFOF business practice less profitable. Still, this would be less severe than outlawing PFOF altogether.
Investors should continue to monitor this situation for further developments. A definitive statement from the SEC that it won’t ban PFOF would be a huge development. It would have ripple effects throughout the trading world and undoubtedly would put Robinhood’s shareholders in a more hopeful mood.
They could definitely use some hope fuel now, as HOOD stock is down to $10 and change after having started 2022 above $18. Today’s price action is promising, though, as the shares jumped 2% to 3% out of the gate this morning.
So, stay tuned as U.S. regulators might actually give Robinhood a break. Some of the investors and many of Robinhood’s customers, it seems, are counting on it.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.