Sharks Start To Circle Robinhood

From all corners of finance and beyond, the critics are circling Robinhood — and is it possible that Robinhood’s (current) business model is circling the drain? Part of the platform’s allure, of course, is tied to commission-free trading. But in the swirl of controversy and criticism surrounding the practice known as “payment for order flow,”  may see some pressure.

In broad terms, brokers reward platforms such as Robinhood for steering orders (trades) to the broker. As noted in this space, EU financial services senior official Ugo Bassi said the region’s securities laws would have prevented such trading, which in turn, charge critics, has led to extreme volatility in stocks such as GameStop.

Elsewhere,  Robinhood CEO Vlad Tenev apologized to the firm’s customers earlier in the month to a congressional committee for trading restrictions that sought to make clearinghouse demand. As for those clearing and settlement activities:  CNBC reported Wednesday (Feb. 24) that the Depository Trust & Clearing Corporation, or DTCC, has outlined a plan to shorten trade settlement — to a single day, down from the two days period currently In place.

Settlement — And Risk 

“The time to settlement equals counterparty risk, which can become elevated during market shocks. It can also lead to the need for higher margin requirements, which are critical to protecting the financial system and investors against a firm default,” said Murray Pozmanter, head of clearing agency services and global business operations at the DTCC, as CNBC reported.  The reduced cycle would conceivably reduce capital pressures by reducing the funds held in margin each day.

In the meantime, as Yahoo Finance reported,  companies are gunning to take some trading share away from Robinhood. Among them: Public.com, which, like Robinhood, offers commission-free trading, and which has been raising funding.  The firm has already said it would eliminate payment for order flow. Other social media/investment platforms include CommonStock and Vested Finance, reported Yahoo Finance.

One tell we’d offer as evidence that payment for order flow may be on the way out: Michael Bolton has a song out skewering the practice, and Robinhood — urging users to break up with the platform. Famed value investor and Berkshire Hathaway Vice Chairman Charlie Munger has weighed in on the rush to trade and the money generated by the traditional clearinghouse (and payment models) as being dangerous.

Said Munger, as quoted by Yahoo Finance, “I have a very simple idea on the subject. I think you should try and make your money in this world by selling other people things that are good for them,” he said. “And if you’re selling them gambling services where you rake profits off the top like many of these new brokers who specialize in luring the gamblers in, I think it’s a dirty way to make money. And I think that we’re crazy to allow it.”

With a jab at Robinhood in particular, he said, “it’s most egregious in the momentum trading by novice investors lured in by new types of brokerage operation like Robinhood,” Munger said. “And I think all of this activity is regrettable. I think civilization would do better without it.”

Robinhood, then, may wind up tweaking its business model sooner rather than later as the chorus against the firm grows.