Explainer-Robinhood makes most of its money from PFOF. What is it?

FILE PHOTO: The Robinhood App is displayed on a screen in this photo illustration January 29, 2021. REUTERS/Brendan McDermid/Illustration/File Photo

NEW YORK (Reuters) - App-based retail brokerage Robinhood Markets Inc was set to make its highly anticipated market debut on the Nasdaq on Thursday.

The brokerage, known for helping pioneer commission-free trading, relied on a controversial practice called payment for order flow (PFOF) for more than three-quarters of its revenue https://www.sec.gov/Archives/edgar/data/1783879/000162828021013318/robinhoods-1.htm in the first quarter.

The U.S. Securities and Exchange Commission is now scrutinizing PFOF over conflicts of interest it says are inherent in the practice.


Retail brokerages send the majority of their customers' orders to wholesale brokers, rather than to exchanges, because wholesalers generally execute the orders at a slightly better price than available on exchanges. Most retail brokers also accept rebates, or payments, from wholesalers in return for their customers' orders.


PFOF, which is disclosed in quarterly regulatory filings, has been a growing source of revenue for many brokers as retail trading volumes have surged.

Some retail brokerages, including Charles Schwab Corp and Robinhood, accept PFOF, while others, including Fidelity and Public.com, do not. PFOF is banned in Canada, the UK, and Australia.

Robinhood has said PFOF allows it to offer commission-free trading.


The SEC is looking into whether PFOF creates an incentive for brokers to route customer orders to places that maximize PFOF rather than to the place that would get the customers the best execution.

Securities and Exchange Commission Chair Gary Gensler also recently expressed concerns that commission-free trading brokerages may encourage investors to trade more, in order to capture more PFOF, even if that is not in the investors' best interest.


No. PFOF has been around for decades and the SEC has historically focused on disclosure of the practice, but its growth in recent years, as commission-free trading models have become the norm, along with an associated increase in off-exchange trading, has led to renewed attention.


In December, the SEC fined Robinhood $65 million for failing to properly inform its customers about PFOF it received that resulted in those customers paying higher prices to execute trades.

The regulator said certain wholesalers told Robinhood there was a trade-off between PFOF and price improvement for customers, and that Robinhood "explicitly offered to accept less price improvement for its customers in exchange for receiving higher" PFOF.

The SEC said the costs to Robinhood's customers "might have exceeded any savings they might have thought they'd gotten from zero commission trading." Robinhood settled without admitting or denying the charges.

(Reporting by John McCrank; Editing by Steve Orlofsky)

Article type: metered
User Type: anonymous web
User Status:
Campaign ID: 46
Cxense type: free
User access status: 3
Join our Telegram channel to get our Evening Alerts and breaking news highlights


Next In Tech News

India antitrust probe finds Google abused Android dominance, report shows
Chinese version of TikTok limits use of app by those under 14
What to expect before buying an eScooter
Work together or fail: 'Operation: Tango' is a game built for two
Millions of gamers on HP computers left vulnerable by security flaw
Workplace meetings hit the road as Microsoft develops Teams for cars
You had one job: Google's alarm fails countless users after update
U.S. probes possible insider trading at Binance - Bloomberg News
Barra: GM will make 'substantial shifts' in supply chain over chips
Verizon sweetens subsidies on iPhones to match competition

Stories You'll Enjoy