The stock price of Robinhood Markets Inc dropped by nearly 7% as of Monday's close following news that payment processing company PayPal Holdings is planning to set up its own online brokerage. The dip was also partly caused by a report stating that regulators may be planning a ban that would negatively affect Robinhoond's business.
A report from CNBC, which cited internal sources, said PayPal is now actively exploring ways to let its customers in the U.S. trade stocks directly on its platform. On the same day, the U.S. Securities and Exchange Commission announced that there may be "an inherent conflict of interest" in payment for order flow transactions.
Robinhood relies on these types of transactions for the bulk of its revenue. The transaction, also known by the acronym PFOF, allows the company to generate profits by sending its customers' orders to wholesale brokers instead of transitional exchanges.
SEC chairman, Gary Gensler, said in an interview that the conflict of interest stems from the fact that companies not only earn from a small spread on each trade but also gather relevant data. He said these companies get the first look at trades and they could potentially use the data to match buyers and sellers from the order flow.
Gensler said the controversial practice may be suitable or the most efficient for today's markets. He did not elaborate further on the comment nor did he mention any instances where PFOF transactions had harmed investors.
Regulators have recently increased their scrutiny on companies such as Robinhood that rely on PFOF transactions to generate profits. Some investors have expressed concerns that the practice may incentivize brokers to prioritize their own profits instead of giving customers the best trade executions.
As of Monday's close, Robinhood's shares were trading at $49.64 per share, 6.9% below its opening price. The company went public in late July. Since then its stock has jumped by more than 25%.
Apart from how it earns its money, Robinhood has been under regulatory scrutiny for its aggressive marketing campaign, which mostly targets inexperienced traders. The company had also been recently criticized for its involvement in the recent meme stock craze.