Vlad Tenev, co-founder and CEO of Robinhood, rings the opening bell on the Nasdaq on July 29, 2021.
Supply: The Nasdaq
Robinhood CEO Vlad Tenev says he does not imagine that the cost for order stream (PFOF) mannequin of market-maker routing that the corporate incorporates within the U.S. is below menace.
That is regardless of calls from notable shopper buying and selling advocates and regulators for a ban on the apply.
Talking with CNBC, Tenev defended the apply of PFOF, saying that it is “inherently right here to remain.” PFOF is the apply of routing trades by means of market-makers like Citadel Securities in return for a slice of the income.
“If I am a enterprise that is promoting issues, and I am producing transaction income, the extra you employ it, the more cash you get. Inherently, there is a battle there as a result of I make more cash by getting you to transact extra,” Tenev advised CNBC in an interview.
“I believe it is vital to not take the infant out with the bathwater. What does that imply, you should not make income on a transaction-based enterprise? That is unreasonable. And I believe the purpose has been politicised to some extent.”
PFOF is considered as controversial due to the perceived battle of curiosity it creates between the dealer and purchasers.
Critics say that brokers have an incentive to direct order stream to market makers providing PFOF preparations over the pursuits of their purchasers.
PFOF is banned within the U.Okay., the place Robinhood introduced plans to launch Thursday.
The U.S. Securities and Trade Fee had checked out banning PFOF in mild of issues surrounding the apply, however opted to not, whereas the European Union has imposed a blanket ban on PFOF.
PFOF accounts for a small chunk of Robinhood’s revenues in the present day, Tenev stated, whereas a lot of its revenue in the present day comes from web curiosity revenue which is generated from money in consumer balances.
Transaction-based revenues, which incorporates PFOF, decreased 7% in Robinhood’s second fiscal quarter to $193 million.
“In the event you take a look at equities, PFOF particularly, it is about 5%. of our income, so a a lot smaller part of the general pie. And we have diversified the enterprise fairly a bit,” together with different areas like securities lending, margin, and subscriptions.
Robinhood’s race to the underside on fee charges has pressured many main gamers within the wealth administration world to slash their very own charges to zero, in flip inflicting some corporations to wind up or promote as much as opponents.
TD Ameritrade was bought to Charles Schwab for $26 billion, whereas Morgan Stanley purchased E-Commerce for $13 billion.
“Within the U.S., Robinhood got here alongside and actually modified the business,” Tenev stated. “The low cost brokers which can be charging commissions basically ceased to exist.”
“They needed to drop commissions to zero. Plenty of them could not survive that transition as standalone corporations and ended up consolidating. And we’re nonetheless dwelling by means of the the top results of that.”
