Robinhood executives have promised to diversify its revenue sources in the coming months and expand its appeal to cryptocurrency users.

U.S. Securities and Exchange Commission Chairman Gary Gensler said in an interview with Barron’s that his agency is considering banning “payment for order flow” practice. Trading in HOOD shares subsequently dropped, as payment for order flow has traditionally been brought in a large chunk of their revenue.

Payment for order flow (PFOF) is the compensation and benefit a brokerage firm receives for directing orders to different parties for trade execution. The brokerage firm receives a small payment, usually fractions of a penny per share, as compensation for directing the order to a particular market maker.

In other words, when someone buys a stock on Robinhood, another company pays Robinhood fractions of a penny per share to match buyers and sellers. Using complex price data, these market makers can execute the trade more efficiently than Robinhood could and take a cut of the resultant proceeds.

This practice enables Robinhood to advertise commission-free trades. And it’s not necessarily a bad thing. The market makers provide liquidity that make reasonably priced trades possible. They can even improve the trading prices for Robinhood customers as they must be able to at least match, if not beat, orders placed directly on a U.S. stock exchange, in line with what’s called National Best Bid and Offer (NBBO).

Gensler has in the past been critical of the PFOF practice, whereby wholesale market makers pay broker-dealers to send them client orders that they execute on their own trading platform or a third-party platform. He has said the practice raises several conflict-of-interest questions.

According to some opinions, the data that market makers receive will reduce competition over time as the best firms price other market makers out, leading to larger spreads. Gensler agrees that it might be better if this data were all public.

“They get the data, they get the first look, they get to match off buyers and sellers out of that order flow. That may not be the most efficient markets for the 2020s.”

Robinhood CEO Vlad Tenev, in the company’s Q2 earnings announcement, remained committed to a number of new product additions, including a crypto wallet and more cryptocurrencies for trading. Its seven listed coins, including Dogecoin, are a primary source of non-PFOF revenue for the firm.

In the Q2 earnings call Robinhood revealed that 60% of accounts with funds in them had begun trading crypto for the first time, enough for crypto revenue to account for 41% of total revenue—up from 17% the previous quarter. Of that, however, 62% came solely from Dogecoin.

Source: Crypto-Friendly Robinhood May Have to Look For A New Main Revenue Stream – Fintechs.fi