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How much Robinhood and other brokerage firms make from payment for order flow

Yahoo Finance Live's Brian Cheung breaks down the chart of the day which looks at how brokerage firms such as Robinhood and others profit from payment for order flow.

Video Transcript

BRIAN CHEUNG: Well, it's time now for our chart of the day. And in this chart of the day, we want to highlight just the importance of how much money a lot of the brokerages that you might be using, like a Robinhood, TD Ameritrade, E-trade, others make off of a practice called payments for order flow. It's used by a lot of brokers to route trade orders. Essentially what it is that someone places an order on exchange and market maker or wholesale like a Virtu Financial or a Citadel Securities will actually execute that trade.

If they get a price improvement they split the bounty among themselves and then also the brokerages themselves. So this is how much money these brokerages are making. And the SEC is reportedly going to make an announcement as soon as perhaps tomorrow that they might require the wholesalers like Citadel Securities or Virtu to compete amongst themselves. That could fundamentally change the way that trades are done when you put in an order on one of these brokerages.

So again, whether or not this is in flux or whether or not these payments for order flows revenues will be changed is an open question. But again, we've got to see the fine detail from the SEC once they make that announcement official. But again, the reporting from the "Wall Street Journal" very much getting a lot of attention today.

- Yeah, it's time to re-up the payment for order flow. Yahoo U--

BRIAN CHEUNG: Oh my gosh.

- --for those who are looking for a little background. But it's interesting to see how we've seen this headline coming from the "Journal" move-- lead to some movers. And I wonder if we can point to Robinhood, because we have seen that stock down significantly. Today more than 7% now. And obviously that's because Robinhood makes a big chunk of their revenue from payment for order flow.

BRIAN CHEUNG: Yeah. I mean, well we saw all those brokerages lower their commission fees to 0 because they're making money off of payments for order flow. So, of course, it's interesting to see that the stock would go down. Although, I want to be clear that the proposal, again, as reported originally by the "Wall Street Journal," doesn't propose ending the whole revenue stream of payments for order flow, just merely enforcing competition. Which in and of itself wouldn't necessarily lead to a tick down in revenues. But interesting to see that at least people with their shares are saying this could be a bad development for Robinhood. So we will see on that front.