Trading platform Robinhood is planning to diversify its revenue sources and minimize its dependence on third-party trading, the app's main offering until recent months.
To achieve this, the firm is planning to expand on its crypto product offering, which may be coming just on time given the US Securities and Exchange Commission’s (SEC) plans to change the stock trading model employed by Robinhood.
In an interview with Barron's, SEC chairman Gary Gensler provided the company with another incentive to do so quickly.
According to Gensler, SEC will be looking to overhaul a practice that it has described as “payment for order flow”.
Through this practice, Robinhood can outsource stock trades to third parties while the platform receives fractions of a penny per share, which is its basic revenue model at the time.
However, this practice may be leading to larger spreads on trades, which are considered bad for traders, and could be causing overall prices to rise because the transactions are carried out outside of exchanges.
Gensler described a list of potential changes to the practice and said: “Transparency benefits competition, and efficiency of markets.”
Gensler argued that the so-called market makers get a first look at the data and they are able to price other market makers out, effectively stifling competition, which may not be the most efficient model for the 2020s.