Robinhood Defends Controversial Payment Model

Robinhood is under attack for its use of the controversial payment for order flow (PFOF) model of market-maker routing. The company uses this model in its flagship U.S. operation.

Consumer trading advocates and regulators have called for a ban on the practice. PFOF is viewed as controversial because of the perceived conflict of interest it creates between the broker and clients.

Critics say that brokers have an incentive to direct order flow to market makers offering PFOF arrangements over the interests of their clients. The payment model is banned in the U.K., but this has not stopped Robinhood announcing plans to launch an office there before the year is out. The practice is also banned in the European Union.

Robinhood CEO Vlad Tenev has defended the practice in a recent interview, calling it “unreasonable” that companies can be stopped from generating transaction revenue, while adding that the matter has become politicized.

The U.S. Securities and Exchange Commission had sought to ban PFOF in light of concerns surrounding the practice, but has so far not done this. Tenev has claimed that revenues from the practice account for about 5% of Robinhood’s total revenue, suggesting the matter was being overblown.

Robinhood has been a leader in the race to reduce commission fees. This has compelled many competitors in the wealth-management space to cut their own fees to zero.

Smaller brokers had to consolidate with larger ones or go out of business. Some commentators contend that Robinhood’s insistence on PFOF cannot be distanced from the zero commission movement it started, as the company needs to find additional revenue streams.