Ark Invest’s Cathie Wood says Robinhood’s payment-for-order flow is so good that she’d be surprised to see SEC scrutiny change it much

Cathie Wood
Cathie Wood. ARK Invest
  • Cathie Wood said she’d be surprised to see Robinhood’s payment-for-order flow system change, even as it faces a potential ban.
  • “The system has been so good from an execution point of view for the end investor,” she said.
  • Robinhood would remain a high-conviction bet for Wood even if the PFOF system is banned.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Ark Invest founder Cathie Wood praised Robinhood’s payment for order flow in a recent interview, despite the system facing a potential regulatory ban, and said the investing app makes up a 1% holding in her firm’s portfolio.

“We’re looking at the payment-for-order flow controversy, we know that Chairman Gensler at the SEC is looking at that. That’s a large percentage of Robinhood’s revenues,” she told Yahoo Finance in an interview published Friday.

“But we actually think that not much is going to change there, because the system has been so good from an execution point of view for the end investor. So we’d be surprised to see a lot change on that front. But again, we’re in a situation where we have to listen to what the SEC is saying.”

The star stock-picker’s flagship Ark Innovation ETF snapped up more than $US45 ($AU60) million worth of Robinhood stock during its downbeat market debut.

Robinhood has been front and center as the broker of choice this year for retail investors scooping up so-called meme stocks and cryptocurrencies. But its payment-for-flow order process faces a potential ban from the Securities and Commission Exchange, on grounds that the practice has “an inherent conflict of interest.”

SEC Chair Gary Gensler hasn’t said whether the controversial practice, a payment that brokerages receive for directing client trades to market makers, resulted in harm to investors. Robinhood has hit back at the ban, calling the idea “draconian.”

SEC staff is currently reviewing the practice and could present proposals in the coming months.

Robinhood does not collect commissions for executing trades like pretty much all other retail broker-dealers, Valentino Vasi, counsel at law firm Seward & Kissel LLP, told Insider. The app gets the bulk of its revenue from PFOF and transaction rebates. In 2020, 75% of its revenue was derived from those practices.

“All broker-dealers should have procedures to be sure traders are not routing orders because of order-flow payments ahead of client best-execution requirements,” Vasi said.

Wood said even if the payment-for-order flow system is banned, Robinhood would remain a high-conviction bet for her, because it “has done a great service to the investing community.”

“I remember when my children were in high school and college, very few of them, or their friends, had any interest in the markets. But I think Robinhood has introduced a whole new genre to investing and thinking about their future,” she said.

Read More: A macro hedge fund investing chief expects a 42% correction in the S&P 500 to play out within a year. He lays out 5 ‘substantial risks’ lurking in the market – and the best way to position for the meltdown