Profit Pregame

What the SEC Investigating Payment for Order Flow Means for You

There’s a Dark Cloud Hanging Over Wall Street

Concerns over the business model of nearly every major brokerage have many investors spooked.

What’s happening?

An immense wave of new traders has entered the market since the start of the pandemic.

Recent research has estimated that as many as 15% of all retail traders in the market right now only started investing since 2020.

And many of them may not be aware of this, but the commissions-free trading that most major brokerages now offer wasn’t always so commonplace.

In fact, until October 2019 – when Charles Schwab announced its move to commission-free stock trades and forced its competitors to follow suit – most brokers charged a fee of several dollars every time a trade was executed.

Instead, brokers that offer zero commission trading have turned to what is called Payment for Order Flow (PFOF), which allows them to still make a profit from their customers’ orders while not charging the customer directly.

Over the last year, there’s been a lot of scrutiny surrounding PFOF and whether it negatively affects retail traders while giving an unfair advantage to the huge Wall Street Institutions that execute the trade orders.

And recent speculation that the SEC could be taking action against the practice could have a tremendous impact on the market.

Where’s the money?

Now, I won’t get too deep into how PFOF works. There are plenty of great resources out there if you want to know more.

But basically, it is the payment that a brokerage firm receives from selling its clients’ orders to a market maker to execute the trade on the clients’ behalf. Those market makers are typically large firms that keep huge amounts of shares on inventory to offer to both buyers and sellers.

Critics of the practice of PFOF claim that it leads to conflicts of interest, because the market makers profit from the spread between the bid and ask prices. Accusations abound that the trades aren’t being executed at the best possible price in order to maximize profits. Some even claim that market makers are able to front run investors’ trades.

That’s prompted the SEC to undertake a new investigation into whether PFOF is being used in an ethical way.

SEC Chair Gary Gensler even went so far as to say that banning PFOF is “on the table.”

And that has a lot of people on Wall Street very nervous, especially the brokers.

How do I get some?

Brokerages that have made their money selling their clients’ order flow in recent years are staring at the possibility that that business model could be outlawed.

Take Robinhood Markets, Inc. (HOOD) for example. According to filings, 75% of Robinhood’s revenue in 2020 came from PFOF.

That’s a huge chunk of HOOD’s bottom line coming from what they receive from market makers buying their order flow that would be gone if PFOF were banned. And for a brokerage that attracted so many users with commission-free trading, it would be a tough pill to swallow.

Shares of HOOD fell more than 9% on Monday after Gensler’s comments, but has rallied in the days since.

I believe investors – after having initially panicked following the news – have woken up to the fact that outright banning PFOF, if it even happens at all, would take years to implement.

What’s more likely to happen is PFOF will be allowed to continue, but with tighter reporting and transparency regulations in place.

To be clear, I’m not telling you to buy HOOD because the market overreacted to Gensler’s comments – far from it.

But there’s sure to be plenty more strong rhetoric about PFOF in the coming weeks and months. Just remember that it doesn’t mean the sky is falling.

Next week may be your only chance to see this…

On Wednesday, September 8, Mark Sebastian is going live for a special event where he’s going to reveal a never-before-seen trading strategy that could turn Wall Street on its head.

When Mark first tried to share this trading strategy with the public, he was fired on the spot from his job as a market maker on the CBOE.

By using a chart pattern that Wall Street had been ignoring, Mark could make up to 1,000% on tiny $100 trades.

There’s no telling how Wall Street will react. We have no idea what kind of fallout this reveal could generate, or if we’ll ever be able to do this sort of event again.

So you definitely don’t want to miss it.

Lock in your spot by signing up for this event right now.

In the Spotlight: Traders brace for September

The SEC making waves isn’t the only thing worrying investors right now.

That’s because the month of September is now upon us. And historically, that hasn’t meant good things for the market.

The Trader’s Almanac is one of the few resources I actually trust when it comes to seasonal/pattern trading.

And it tells us that, historically, September has been the worst month of the year for stocks.

Though the market has been on an incredible run this year, there are many that believe that the typical weakness of September could bring a reversal – much like we saw last year as the market corrected almost 10% after a bull run.

Stocks can’t go up forever, and I’ve been saying for a while now that the market needs to move lower in order to attract more buyers.

But even though the market may be headed lower in the near future, I’m still equipped to find the stocks that the market’s biggest buyers are still pouring into with my S.C.A.N.

And I’ll be sure to share with you my best tips to weather the coming downturn. Stay tuned.

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