It’s no secret that Gary Gensler wants to make life miserable for the people at Robinhood, the no-commission brokerage firm that has become a sensation among the growing ranks of amateur day traders.
Less known is what I’m hearing from the people at Robinhood: They are planning to make life pretty miserable for Gensler.
Of course, it’s never a smart thing to pick a fight with your chief regulator; that’s why most Wall Street firms simply settle. Gensler, as SEC chairman, can order up any number of investigations and examinations into Robinhood’s sometimes controversial business practices, which are designed to make stock trading fun.
But Robinhood isn’t picking the fight. Plus the people there know what Gensler has proposed recently — a possible banning of something known as Payment for Order Flow, or PFOF — has existential ramifications for the brokerage firm. The firm makes most of its money through the practice. Its stock tanked last week on Gensler’s comments to the financial publication Barron’s about a possible ban.
That’s good enough reason for the company to draw up plans for a sharp counter assault if Gensler pushes the PFOF ban button. Another reason is the absolute idiocy of Gensler’s targeting of PFOF and Robinhood itself.
Robinhood needs regulating like everything else on Wall Street, but we are far better with it than without it. Investors can trade free; they can buy even fractional shares of stock. Yes, the firm has pushed the envelope with gimmicks (free shares of penny stocks) but gimmicks are a part of Wall Street. Moreover, why plow your money into some fee-based exchange traded fund hawked by Larry Fink’s Blackrock when you can buy your own?
And Robinhood wouldn’t exist without PFOF, which allows average people to trade at a discount, or in Robinhood’s case, no fee. Discount brokers make money selling their customers’ buy-and-sell orders to other Wall Street firms, so-called market makers like Citadel Securities and Virtu Financial that match the trades skimming fractions of a penny between the bid-and-ask spreads of the stock.
This is where Gensler does his best Oliver Stone-conspiracy theorist impersonation about the practice and Robinhood itself. By having all this order flow, and all their computerized know-how, Citadel and Virtu have an unfair information advantage for their own trading, he suggests.
In directing those trades to Citadel and Virtu, Robinhood is incentivized to overlook any scammy stuff because of the fees it receives. The firms can hide all this allegedly nefarious trading activity in various “dark pools” or private markets that exist all over Wall Street.
Or so Gensler claims. Yet he offers no proof of PFOF fraud. He hasn’t shown evidence that market makers are consistently cheating customers of the discount brokers by not giving them the best price in their “dark pools” as they are legally obligated to do. He wants these trades to be routed to traditional exchanges, but he also offers no evidence that sending all order flow to the NYSE or Nasdaq will be better for the consumer. And he doesn’t say why we need to blow up a system that allows average people to trade for free.
He then elides over years of market reforms. Years ago, regulators didn’t want all that trading order flow to go to the Nasdaq or the NYSE because of various scandals and because competition in market making leads to lower costs for individual traders.
Maybe most absurd about Gensler’s bluster on this issue is that this former Goldman Sachs banker and MIT finance professor is now channeling the conspiracy theory circulating among those annoying meme stock investors who run around Internet — blaming dark pools and Citadel for any negative print on meme stocks like AMC Entertainment, the money-losing theater chain.
This ball of stupidity is why Robinhood is ready to fight back and fight back hard — first by lobbying Congress (it already managed to water down a bill coming out of the House Financial Services Committee that sought a similar PFOF ban). Look for Robinhood’s lobbyists to turn to GOP members in Congress to grill Gensler with hearings (particularly if the GOP takes Congress) on PFOF as well as his various woke-regulatory follies that have nothing to do with shareholder protection.
Gensler will also likely find himself in court. Robinhood or any number of discount brokerages are talking about suing the SEC and Gensler before the DC Circuit that has shot down SEC overreach in the past.
Again, I can’t remember a brokerage firm trying to go to war with Wall Street’s top cops. But if it doesn’t fight back, Robinhood is looking into the abyss, and that’s why this fight could get ugly.
