Robinhood: SEC decision on order payments is no cure for growing pains

To ban or not to ban. When it comes to Robinhood and the issue of payment for order flows (PFOF), that may no longer be the question. Last year, the US Securities and Exchange Commission considered changing the rules around the controversial practice, in which brokers sell customer trades to wholesale market makers. Now an outright ban appears to be unlikely.

Yet this decision, even if true, will not result in much relief for Robinhood or its share price. PFOF is no longer the cash cow it once was.

Robinhood helped to fuel a retail stock trading boom during the pandemic with its commission-free trades. But the end of Covid-19 lockdowns and a brutal market sell-off has put the brakes on retail trading activity. This has been particularly painful for Robinhood, which gets the bulk of its revenue from PFOF.

Robinhood took in 43 per cent less in revenue during the first six months of the year and racked up $687mn in losses. The number of monthly active users fell 29 per cent in August from a year ago.

Robinhood needs to reinvent itself. Its future may lie in the business model that it has sought to disrupt.

Attracting “sticky” money would be a start. This is long-term capital that investors park with brokers. Average account size at Robinhood was just $4,000 at the end of March, according to research firm BrokerChooser. At Fidelity and Charles Schwab, the figure was $279,000 and $234,000 respectively.

The difference matters in a rising interest rate environment. Like banks, brokers use the idle cash sitting in their clients’ accounts as a source of income. At Schwab, net interest income — up 30 per cent to $2.5bn during the second quarter — accounted for half of group revenue. By contrast, Robinhood’s net interest income is a more modest $74mn.

Investors have lost faith in Robinhood. The company’s market value has shrunk from a high of $59bn last year to just $8.5bn. Strip out the $6bn of cash on hand and the market is basically assigning an equity value of $2.5bn to the shares. But this also means it would not take much good news for Robinhood’s shares to rebound.