This week the House Financial Services Committee convenes for the third hearing regarding the recent Robinhood, GameStop and r/wallstreetbets events. Payment for order flow, the gamification of investing, and the future of retail investing are some of the primary topics being investigated.
See what our CEO, Al Grujic, had to say in the second House Financial Services GameStop hearing. Al spoke about leveling the playing field for all investors, access to private markets, the pros and cons of PFOF (payment for order flow), retail vs institutional trading, and more.
The narrative that markets are rigged and big institutions steal from the little guy is mostly not true. It’s too simplistic. Though there is room for market improvement.
Leveling The Playing Field For Retail Investors
Retail investors don’t have the same tools as the big institutions and tend to underperform the market over time. This critical problem was the inspiration for All Of Us Financial and the mission to level the playing field for retail investors.
One way is to deliver institutional capabilities to retail investors with data, knowledge, access, and influence. That’s the mission at All Of Us.
We at All Of Us do get paid for order flow but we believe in transparency so we share a piece of our revenue with our customers (Learn more about revenue sharing).
“PFOF is not a necessary component of our market structure but it is an effective way for markets to operate.”
It’s important to measure the cost and benefits of PFOF. Regulation requires that market makers trade at or better than best prices available on exchanges.
Market makers and exchanges provide services and should be paid for it. Market makers provide liquidity, price discovery, and customer services. These services cannot be provided for free.
If we prohibit PFOF, commissions will likely increase and things like fractional shares may be uneconomical.
Read more about the myths surrounding PFOF.
Retail And Institutional Flows
Some claim separating retail institutional flow harms retail investors. Market makers value retail flow more than institutional flow and if we forced them into the same market structure the average price received will be worse for retail investors.
Gamification and social investing is a powerful force and can be used for good and bad. Younger generations want products and services with social media. Good gamification and social investing can drive financial literacy, education, and encourage healthy behaviors (See more about our social investing and Sharpeshooter challenge).
The right regulatory balance is to encourage innovation that benefits retail investors while also protecting investors. The GameStop saga shows us that our markets can be improved and education for retail investors is critical.
Should PFOF Be Banned?
If we banned PFOF, commissions would come back. Brokers still had misalignment with commissions of trying to push more trading. PFOF is similar in the misalignment.
Two things that are less optimal about fixed commissions:
Fixed commissions don’t reflect the true economic value of a trade - large trades and small trades charged the same.
Fractional shares are important, especially for smaller investors, as they allow small investors to trade high-priced stocks. And fractional shares might become uneconomical with a commission-trading world.
Accredited Investor Rules & Access For Everyone
The accredited investor rules (accreditation qualifications) are outdated and don’t allow everyone to participate in investments. Private investments should be available to everyone. Private markets may be a greater opportunity than public markets over the next decade, so leveling the playing field is critical.
The investor protection rules should not be based on wealth but based on understanding and ability to make these investments.
There's a benefit to having retail investors have access to private markets.
The biggest concern is education and understanding. We can find better ways to protect investors like market understanding qualifications as opposed to wealth as a qualifier.
What Would The Impact Of An FTT (Financial Transaction Tax)?
It would increase the cost of transactions and decrease liquidity in the market due to added friction. This could lead to some amount of a loss of signaling optimal pricing because the tax might price people out of certain transactions.
Retail vs Institutional Flows
Retail flow is more benign to market makers, less correlated, and less dense. There is a concern retail flow is dumb flow and that’s why market makers make more money on retail flow. Investors do need to be educated. But retail flow is smaller and since there are more individuals involved, there will be diversity in that order flow.
Institutional flow is generally adversarial to market makers because of certain characteristics. Large orders can move markets and be risky for market makers. PFOF decreases the amount of time that market makers hold risk in inventory.
The market maker prices to increase chances of offsetting another trade on their books. So they tend to make more money on retail flow. If we combine retail and institutional flow then the price for retail flow will go up.
Using Technology To Bridge The Gap
Financial markets also serve as information signaling. If we add friction to the markets, they will decrease efficiency and information signaling. Technology is very empowering to deliver information and empowerment for retail investors. Individuals don’t have the same tools as institutions, but technology can help bridge the gap.
All Of Us Financial
Check out some of the highlights from Al’s testimony here. Learn more about All Of Us and join the mission. We’re the radically transparent brokerage that pays you for your trades and brings social investing to new levels.