But new regulations teased by the US Securities and Exchange Commission have raised questions about the future of the fee-free business model and are sparking a raucous debate on Wall Street over whether such changes are really necessary.
Robinhood, or your broker of choice, takes your order to a company known as a wholesaler or market maker. These are the middlemen who must get the best price and who pay brokers for the privilege of referring them to lots of trades. They typically earn pennies with every transaction.
This process is known as “pay by order flow”. He’s been under intense scrutiny from regulators following the fallout from the January 2021 rush on meme stocks like GameStop.
GameStop’s frenzy “exposed how U.S. stock markets are manipulated to enrich big Wall Street firms, high-frequency trading firms and brokers at the expense of Main Street retail investors,” Dennis Kelleher, CEO of Better Markets – a non-profit organization designed to protect Americans from the excesses of Wall Street – he wrote at the time.
The SEC has been overhauling the system, which accounts for most of how exchanges like Robinhood make money. Gensler said on Wednesday that the agency is considering whether to add more mid-tier competition to ensure retail investors are indeed getting the best prices.
In this scenario, orders would be forwarded to auctions where trading companies 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.
The conclusion: this all gets too technical. But Wall Street is warning that the consequences of such moves could be huge, and that fee-free trading could be a victim of the SEC’s potential overhaul.
Robinhood shares fell 4% on Wednesday. They are now down 53% year-to-date. Charles Schwab shares, which fell 22% in 2022, are down nearly 3%.
“Retail investors, in particular, enjoy the greatest access and lowest investment cost they have ever experienced,” the Securities Industry and Financial Markets Association, a lobbying group, said in a statement. “Changes that could affect these costs, by eliminating low or zero commissions or limiting order fulfillment locations, should be closely analyzed and subjected to a robust cost-benefit analysis.”
Speaking at the same conference as Gensler, Robinhood Chief Legal Officer Dan Gallagher said he feels the SEC is presenting “a solution looking for a problem.”
“It’s a very good climate for retail, so going in and messing with that right now, for me, is a little worrying,” he said.
But Kelleher of Better Markets said Gensler’s proposed reforms were “reasonable” and “modest” and would build essential public trust in the functioning of markets. He issued a warning: “Don’t believe the weeping billionaires.”
“The financial companies that benefit most from today’s rigged markets are already complaining about the president’s actions and even claim that his proposals will hurt retail investors,” Kelleher said. “But seriously, who are you going to believe?”
Europe braces for first 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 raises the risk of recession.
The latest: The central bank, which will make a monetary policy announcement after a meeting of its governing council in Amsterdam on Thursday, has already laid out its plans to raise rates at its next meeting in July, reducing the chances of a surprise. .
“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 using the euro reached 8.1%, an all-time high.
Investors expect another rate hike in September. But the magnitude of the movements remains subject to debate.
Bank of America, for example, thinks the ECB will increase by half a percentage point in July and September, followed by two smaller increases 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, underscoring the difficulties in predicting where the economy will go next.
‘Blank check’ mergers keep failing
During the escalating stock market rally from the coronavirus pandemic, Wall Street became obsessed with “blank check” mergers. Investors would raise money for special-purpose acquisition companies, or SPACs, that would go public and then hunt down acquisition targets.
In 2021, SPACs raised about $143 billion, nearly double the record $73 billion in 2020, according to CB Insights.
Activist investor Bill Ackman’s SPAC has yet to find a company to buy after a deal to acquire a 10% stake in Universal Music Group collapsed last year.
Another SPAC run by Billy Beane — the baseball executive played by Brad Pitt in “Moneyball” — said this month that it is ending its deal to buy the SeatGeek ticket app, citing “current unfavorable market conditions.” Media group Forbes recently ended its merger talks with a SPAC called Magnum Opus Acquisition Limited.
Once a SPAC goes public, it typically has around 18 to 24 months to buy a company before it is forced to dissolve and return money to investors. This means that a large number of blank check firms are now struggling to finalize deals – and many will not succeed.
Also today: US jobless claims for last week’s job at 8:30 am ET.
Tomorrow: Key data on annual consumer price inflation in the United States. Economists consulted by Refinitiv expect to know that it held steady at 8.3% in May.
— Allison Morrow contributed reporting.