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Reps. Foster, Axne Press Robinhood for Increased Transparency to Prevent Conflicts of Interest

Mar 3, 2021
Press Release

WASHINGTON, D.C. – Today, Rep. Bill Foster (IL-11) and Rep. Cindy Axne (IA-03) wrote to Robinhood co-CEO Vlad Tenev asking for details of the agreements between Robinhood and market makers like Citadel to clarify how Robinhood sells customer orders, and how it collects payment for order flow (PFOF).

Their letter follows up on their questioning of Mr. Tenev at a February 18th, 2021 hearing in the House Financial Services Committee where they expressed concern about the lack of transparency around PFOF. At that hearing, Mr. Tenev indicated his willingness to share these agreements.

“We wanted to follow up on your offer to provide us with the PFOF agreements that you are a party to, so that we can better evaluate the terms of such relationships, the method by which you are compensated, the duration and scope of such agreements, the types of information that flow to market makers, and other terms and conditions that could bear on the treatment of your retail investors,” the members wrote. “This information is critical to understanding whether the current disclosure regime we have in place is adequate to the needs of retail investors.”

Payment for order flow is a practice used by many retail brokers, where a market maker will pay the broker to execute its users’ orders, in the hope that they can profit from trading against those users.  

This process has raised concerns about potential conflicts of interest that are created for the broker, as they are pushed to balance their duty to provide the “best execution” for their users’ orders with their own incentive to maximize revenue through higher rates from market makers.

There is limited public information available about how PFOF works, and what information is available does not allow retail investors to make an informed decision as to which brokers offer the best execution for their orders.

The members went on to highlight that they are in the midst of a three hearing process to evaluate retail trading practices and other issues illustrated by Gamestop’s recent volatility, and that added transparency surrounding the relationships between brokers and market makers is helpful not only for investors, but also for policy makers evaluating how best to address these conflicts of interest.

“While we frequently hear from PFOF participants that it has benefited retail investors, without viewing the detailed agreements it would be difficult to properly assess those benefits as policy makers,” the members continued. “Given your mission to democratize finance and your view that PFOF benefits retail investors, we would encourage you to post these agreements publicly in addition to sharing them with us.”

In December, Robinhood settled with the Securities and Exchange Commission (SEC) for $65 million over charges that it had placed its PFOF revenue over the interests of its users.

The next hearing on this topic is scheduled for March 17, 2021.

The full text of the letter can be found below: