But new regulations teased by the U.S. Securities and Exchange Commission have raised questions about the future of the no-fee business model and are sparking heated debate on Wall Street about whether such changes are really necessary.
Robinhood, or your broker of choice, forwards your order to a company known as a wholesaler or market maker. It is the intermediaries who are supposed to get you the best price and who pay the brokers for the privilege of routing lots of trades to them. They usually earn pennies on each transaction.
This process is known as “payment for order flow”. It has come under intense scrutiny from regulators following fallout from the January 2021 surge in meme stocks like GameStop.
The GameStop frenzy “exposed how the U.S. stock markets are rigged to enrich big Wall Street corporations, high-frequency trading firms and brokers at the expense of Main Street retail investors,” Dennis Kelleher, CEO of Better Markets — a nonprofit aimed at protecting Americans from the excesses of Wall Street — wrote at the time.
The SEC has reviewed the system, which is the bulk of how brokerages like Robinhood make money. Gensler said Wednesday that the agency is considering adding more competition at the intermediary level to ensure retail investors actually get the best prices.
In this scenario, orders would be routed to auctions where trading firms would have to compete to execute them.
“It’s not clear…that our current national market system is as fair and competitive as possible for investors,” Gensler said.
Take-out meals: this all gets very technical. But Wall Street warns that the consequences of such moves could be huge, and that fee-free trading could be a casualty of the SEC’s potential overhaul.
Robinhood shares fell 4% on Wednesday. They are now down 53% since the start of the year. Charles Schwab’s stock, which is down 22% in 2022, fell nearly 3%.
“Retail investors in particular are enjoying the best access and lowest cost of investing they have ever experienced,” the Securities Industry and Financial Markets Association, a lobby group, said in a statement. “Changes that could impact these costs by eliminating low or no commissions or limiting where orders can be executed need to be carefully considered and subject to a robust cost-benefit analysis.”
Speaking at the same conference as Gensler, Robinhood chief legal officer Dan Gallagher said he believed the SEC presented “a solution in search of a problem.”
“It’s a very good climate for retail, so to go ahead and get involved right now, for me, is a little worrying,” he said.
But Better Markets’ Kelleher said Gensler’s proposed reforms were “reasonable” and “modest” and would boost public confidence in the functioning of markets. He issued a warning: “Don’t believe whining billionaires.
“The financial companies that benefit the most from today’s rigged markets are already complaining about the president’s actions and even claiming that his proposals will hurt retail investors,” Kelleher said. “But seriously, who are you going to believe?
Europe braces for first interest rate hike since 2011
The European Central Bank is preparing to raise interest rates for the first time since 2011 as the war in Ukraine fuels record inflation and increases the risk of recession.
The latest: The central bank, which will make a policy announcement after a meeting of its board of governors in Amsterdam on Thursday, has already presented its rate hike plans at its next meeting in July, reducing the risk of surprises.
“The conditions facing monetary policy have changed markedly,” she wrote.
The big question now is how aggressive the ECB decides to be. In May, annual inflation among the 19 countries that use the euro reached 8.1%, an all-time high.
Investors expect another rate hike in September. But the extent of the movements remains subject to debate.
Bank of America, for example, thinks the ECB will hike half a percentage point in July and September, followed by two smaller hikes in October and December.
On the radar: The ECB will also release its latest economic forecast on Thursday. It is likely to lower its growth expectations and raise its inflation outlook, pointing to difficulties in predicting the direction the economy will take.
“Blank Check” Mergers Continue to Fail
During the stock market‘s meteoric recovery from the coronavirus pandemic, Wall Street became obsessed with “blank” mergers. Investors would raise funds for special purpose acquisition companies, or SPACs, which would go public and then seek takeover targets.
In 2021, SPACs brought in an estimated $143 billion, nearly double the 2020 record of $73 billion, according to CB Insights.
Activist investor Bill Ackman’s SPAC still hasn’t found a company to buy after a deal to acquire a 10% stake in Universal Music Group fell apart last year.
Another SPAC led by Billy Beane — the baseball executive played by Brad Pitt in “Moneyball” — said this month it was ending its deal to buy ticketing app SeatGeek, citing “market conditions unfavorable current”. Media group Forbes recently ended its merger talks with a SPAC called Magnum Opus Acquisition Limited.
Once a SPAC goes public, it usually has about 18-24 months to buy a company before it is forced to dissolve and return money to investors. That means a slew of blank check companies are now scrambling to finalize deals – and many won’t succeed.
Also today: U.S. jobless claims for the past week at 8:30 a.m. ET.
Coming tomorrow: key data on annual US consumer price inflation. Economists polled by Refinitiv expect to learn that it remained stable at 8.3% in May.
— Allison Morrow contributed reporting.