Robinhood jumps, then fades after report that SEC will not ban payment for order flow

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A woman's silhouette holds a smartphone with the Robinhood Markets logo in the background.
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Shares of retail brokerage Robinhood closed lower on Thursday, giving up early gains, after a report that U.S. regulators would not ban payment for order flow, a key part of the company's business model.

Bloomberg News reported before the market opened that the Securities and Exchange Commission would stop short of banning payment for order flow, though the regulatory agency may still make rule changes that could lower the profitability of the practice.

Shares of Robinhood fell 2.7% on the day after being up more than 11% earlier in the session.

Payment for order flow is a controversial practice that effectively allows market makers and brokerage firms to split the profit made on trades from retail customers. It is a key source of revenue for Robinhood and other low-cost brokerage firms, and it helps them offer trading with no upfront cost.

SEC Commissioner Gary Gensler has been critical of the practice, questioning whether the payment relationships between market makers and brokerage firms was hurting the execution price for customer trades.

"Our markets have moved to zero commission, but it doesn't mean it's free. There's still payment underneath these applications. And it doesn't mean it's always best execution," Gensler told CNBC's "Squawk on the Street" last year.

An SEC spokesperson said in a statement Thursday that "Chair Gensler said in his recent Congressional testimony that he believes that it's appropriate to look at ways to freshen up the SEC's rules to make our equity markets as fair, efficient, and competitive as possible for investors, particularly for retail investors."

"Staff is considering possible recommendations related to best execution; disclosure of order execution quality; the National Best Bid and Offer; minimum price increments ('tick size'); exchange access fees and rebates; payment for order flow; and order-by-order competition," the statement continued.

Dan Gallagher, Robinhood's chief legal, compliance and corporate affairs officer, said in a statement that the company was not surprised by the report and that "a ban, or other unnecessary, overly complicated market structure rule changes, will only harm the millions of Americans who are now participating in the stock market for the first time."

The company's stock is down more than 40% year to date as the brokerage firm has seen user growth reverse after rapidly expanding during 2020 and 2021.

Elsewhere, shares of market maker Virtu Financial rose more than 8% following the report.