Today, when you buy or sell a stock on an app, the trade appears to be instantaneous. But beneath that simple buy/sell action is a complex web of Wall Street players exploiting tiny differences in price to rake in huge amounts of cash.
Here’s how it works: When you tap buy or sell, Robinhood (or your broker of choice), takes your order to a firm known as a wholesaler or market maker — the middlemen who are supposed to get you the best price and who pay the brokers for the privilege of executing the trades. They typically make pennies off each transaction.
That process is known as “payment for order flow,” and it has come under intense scrutiny by regulators following the fallout from the January 2021 run-up in meme stocks like GameStop.
The Securities and Exchange Commission has been reviewing the system, which accounts for the bulk of the brokerages’ revenues. In August last year, Robinhood’s stock tumbled after SEC Chairman Gary Gensler said that an outright ban of payment for order flow was “on the table.”
One proposed new rule, the paper said, would add more competition at the middleman level to ensure retail investors are actually getting the best prices. In that scenario, orders would be routed into auctions where trading firms would have to compete to execute them.
Representatives for the SEC and Robinhood didn’t immediately respond to CNN Business’ request for comment.
— CNN Business’ Matt Egan contributed to this article.
