At 10am Eastern time today, Congress will be having its second hearing about the frenzy in GameStop Corp. shares that sent the stock up 1700% in January. This hearing is unlikely to affect the price of the stock much. Rather, it will dig into whether or not the trading system around it is fair.
A major focus will be a process called “payment for order flow”. This is the revenue model used by brokers including Robinhood, which handled many of the trades in GameStop. Under this model, the app user pays nothing to trade stocks. Instead, Robinhood gets money from the companies that execute the trades for the privilege of fulfilling those orders.
Experts on payment for order flow will testify:
Sal Arnuk, co-founder of trading firm Themis Trading, plans to spotlight the growing role of payment-for-order-flow, where retail brokerage houses such as Robinhood channel customer orders to specific trading firms in exchange for payments.
“These practices create a massive incentive for such brokers to sell their clients orders to sophisticated trading firms uniquely tooled to profit off of them,” Mr. Arnuk will say, according to preliminary testimony released by the House committee. “This is a needless conflict that can harm retail investors, and it degrades the integrity of the market ecosystem as a whole.”
Why do the companies, like Citadel, that execute the trades want to pay to do it? Because they can find a price better than the public market, buy or sell to you for a slightly worse price (but still better than the public market), and keep the difference for their trouble.
Robinhood and Citadel maintain this is a better deal for investors. And indeed, there is independent research to support that claim. However, Citadel has been fined for giving customers worse prices than public markets, as has Robinhood.
A month ago, I called for Robinhood and Citadel to release a data set of executed trades to prove their service is a better deal than public markets. Congress may demand something similar. If their service really is better, they have nothing to lose and everything to gain by showing us what a great deal they provide!
For more information on payment for order flow and GameStop, check out these posts:
- Payment for Order Flow Really Does Help Investors, Research Indicates
- GameStop Short Squeezes Are Over
- Pattern in GameStop Bonds Spells Trouble For Reddit’s Favorite Stock
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