This an important revenue stream for Robinhood, which popularized the practice in 2020 when US households were flush with stimulus checks and ready to play the market. Since then, trading on Robinhood has declined — along with its stock price — and it has tried to diversify revenue streams.
According to analyst Devin Ryan of JMP Securities, PFOF made up 9% of Robinhood's equities revenue last quarter, 36% of options revenue, and 18% of crypto revenue. Shares of the company surged on the report that the SEC wasn’t planning to institute a ban. However, then Robinhood then erased that gain and closed down 2.72% at $9.65 a share — far less than this time last year, when it was trading for five time as much.
Still, it's clear the Bloomberg report on the SEC's decision regarding PFOF is good for Robinhood. Is that gain coming at the expense of small investors? Trading firms, predictably, think there’s no issue with the current system, and argue that retail traders already get good prices. SEC Chair Gary Gensler has largely taken the other side, saying in June that payment for order flow “can distort routing decisions.”
Watch: How does payment for order flow work?
The solution to that problem isn't to get rid of PFOF, according to Christopher Schwarz, a professor at the University of California Irvine, who co-authored that study. Instead, he said, brokerages should be more transparent about prices.
The debate over banning PFOF “is the shiny thing in the room that is distracting everyone from the issue of market centers giving very different execution to different brokers. And that execution is not related to PFOF," Schwarz wrote Yahoo Finance on Thursday.
Jared Dillian, editor and publisher of the Daily Dirtnap and investment strategist at Mauldin Economics, argued last month for Bloomberg Opinion that regulation of PFOF could backfire.
"The US has the deepest, most liquid capital markets in the world, but we might not if regulators start getting too involved," he wrote. "As long as competition exists, things will get better and trading costs will come down even further.”
Undoubtedly, many on Wall Street agree with Dillian, and papers like those from Schwarz may have swayed the SEC to look at the issue differently. Of course, the agency might end up banning PFOF or restricting it. In the meantime, it's tough to say whether investors are mad at PFOF or just wary of the market these days.
The number of people trading via Robinhood has fallen this year, to 14 million monthly transacting users by June 2022 from 17.3 million last December. As Robinhood's user base has shrink, alternatives have cropped up — including Public.com, which is commission-free, doesn’t offer payment for order flow, and allows users instead to offer a tip to brokers that execute their trades. The company says its users grew from 1 million in mid-2021 to 3 million in early 2022.
Ultimately, PFOF might fall out of favor, regardless of whether the SEC steps in to police the practice. | 
