Along with this line of attack the regulators will also be looking at the point where discussion and stating your opinion on r/wallstreetbets crosses the line and becomes market manipulation.
From MarketWatch via Morningstar, February 3:
Payment for order flow could reemerge as a focus for federal regulators
Online brokerage Robinhood has drawn bipartisan ire in Washington after it unexpectedly restricted purchases of share GameStop, Inc. and other hot stocks, and this attention could motivate regulators to curtail its most profitable line of business, experts tell MarketWatch.
While public outrage has centered around the conspiracy theory that Robinhood blocked purchases (link) of GameStop (GME) and other stocks in order to help Citadel Securities -- one of its largest sources of revenue and a sister company to the hedge fund Citadel -- the known facts support Robinhood's claim that its actions were taken in order trim risk in the face of collateral requests from the clearinghouse that executes its trades.
Meanwhile, Citadel said in a statement last week that "Citadel Securities has not instructed or otherwise caused any brokerage firm to stop, suspend, or limit trading or otherwise refuse to do business."
See also: Lawsuits see conspiracy in Robinhood's GameStop moves, but experts doubt narrative (link)
But with Robinhood CEO reportedly scheduled (link) to testify before the House Financial Services Committee and Treasury Secretary Janet Yellen set to host a a meeting (link) with top federal regulators to address last week's events, the broader implications of Robinhood's connection with Citadel could be brought to the fore and force the Securities and Exchange Commission and the Financial Industry Regulatory Authority to reign in the practice of payment for order flow, whereby market makers pay brokers for the privilege of executing investor trades.
"The SEC and FINRA have inexplicably allowed payment for order flow to continue for years," said Tyler Gellasch, executive director of Healthy Markets, a nonprofit consortium of pension funds that advocates for rights of investors.
Gellasch said that its difficult to reconcile the stock broker practice of selling the right to trade against one's clients with "best execution" regulations that essentially require brokerages to find the best price for their retail clients.
Market makers have huge upfront costs, including technology, infrastructure, data and payment for order flow (PFOF), he said. "After all four of those expenses, they still turn a profit from trading against a customer even though they have no significant financial exposure themselves for any period of time."
Famed venture capitalist Bill Gurley also brought attention to the practice in a series of tweets Sunday, where he pointed out that even Citadel itself was once against the practice, when it told the SEC in 2004 (link) that PFOF "creates an obvious and substantial conflict of interest between broker-dealers and their customers."....
....MUCH MORE
