To ban or to not ban. When it involves Robinhood and the problem of cost for order flows (PFOF), which will now not be the query. Last yr, the US Securities and Exchange Commission thought-about altering the principles across the controversial follow, during which brokers promote buyer trades to wholesale market makers. Now an outright ban seems to be unlikely.
Yet this determination, even when true, is not going to lead to a lot aid for Robinhood or its share value. PFOF is now not the money cow it as soon as was.
Robinhood helped to gas a retail inventory buying and selling growth throughout the pandemic with its commission-free trades. But the tip of Covid-19 lockdowns and a brutal market sell-off has put the brakes on retail buying and selling exercise. This has been notably painful for Robinhood, which will get the majority of its income from PFOF.
Robinhood took in 43 per cent much less in income throughout the first six months of the yr and racked up $687mn in losses. The variety of month-to-month lively customers fell 29 per cent in August from a yr in the past.
Robinhood must reinvent itself. Its future might lie within the enterprise mannequin that it has sought to disrupt.
Attracting “sticky” cash could be a begin. This is long-term capital that buyers park with brokers. Average account dimension at Robinhood was simply $4,000 on the finish of March, in response to analysis agency BrokerChooser. At Fidelity and Charles Schwab, the determine was $279,000 and $234,000 respectively.
The distinction issues in a rising rate of interest setting. Like banks, brokers use the idle money sitting of their shoppers’ accounts as a supply of earnings. At Schwab, internet curiosity earnings — up 30 per cent to $2.5bn throughout the second quarter — accounted for half of group income. By distinction, Robinhood’s internet curiosity earnings is a extra modest $74mn.
Investors have misplaced religion in Robinhood. The firm’s market worth has shrunk from a excessive of $59bn final yr to simply $8.5bn. Strip out the $6bn of money available and the market is principally assigning an fairness worth of $2.5bn to the shares. But this additionally means it will not take a lot excellent news for Robinhood’s shares to rebound.
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