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Robinhood tanks on SEC warning, Paypal exploring stock-trading platform

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Myles Udland and Brian Sozzi dive into some of Tuesday’s early market movers, which include: Robinhood’s stock taking a drastic hit after the SEC Chairman Gary Gensler discloses the possibility of banning payment for order flow and PayPal expressing interest in integrating stock-trading in its platform after the recent retail trading boom showed profitability.

Video Transcript

MYLES UDLAND: All right, couple minutes out from the opening bell here on this Tuesday morning, as we wrap up the trading month of August. Let's take a look at shares of Robinhood. They're off about 3%-- or they were off last check about 3% in the premarket. We see here bouncing around. In yesterday's session, the stock closed down almost 7% following some comments from SEC chairman Gary Gensler in an interview with Barron's.

And Sozz, the headline here is that a full ban of payment for order flow, in Gensler's view, according to Barron's, is, quote, "on the table." So, I guess that's worth 7% for Robinhood. I mean, Robinhood is the center of the conversation around payment for order flow.

They are far from the only company that gets paid for its order flow, that there's really only one company, public, a startup, that has talked explicitly about not getting paid for its order flow, which you can then imply means every other broker gets paid for its order flow, the retail order flow, which is, indeed, quite valuable. I would be surprised if this comes to pass, but I'm also a little bit surprised at how sensitive the stock was to just this headline.

BRIAN SOZZI: I will take the other side of that. I am not surprised. I mean, this is a momentum stock. It also-- keep in mind, it got caught into the meme stock trade about a month ago. So it is trading at pretty lofty levels here. And really, essentially, you have the SEC chairman potentially upending the business model of Robinhood, or at least calling it into question. So I think the move is right. And I wouldn't be shocked if more valuation-- more value comes off of Robinhood here. I mean, this could be a complete change in business. Now I'm not saying any change in payment for order flow is happening tonight. But I mean, the market has surprised us in today.

MYLES UDLAND: Yeah, but I mean, yeah, so what's going to happen is then, you have to pay Robinhood to execute its trades. And then Robinhood still sells a version of the order flow to market makers. Like, you know-- and I know they're trying to set up their own operations. They don't have to do that. But, like, the move to zero was a consumer benefit. But you are still always-- like, when you execute a trade on E-Trade, that went somewhere, right, even if it was 5.99.

BRIAN SOZZI: Well, then, it's chaos because not only do you have that profit center that is payment for order flow, but then, what, are you back to charging people for trades? And then how does that impact the whole industry? I mean, it just-- it would be chaos for Robinhood, really. It would be very chaotic.

MYLES UDLAND: But yeah, I mean, I think the other side of this is, where did most of Robinhood's money come from? Where was its revenue from the last couple of quarters? It's from options trading, which is not free, and it's not going to be free. And it's from trading crypto, which is also a long way away, given the maturity of that market relative to the equity market, a long way away from those trades being free.

And so, what it's going to do-- and now I sound like a boomer because this is the boomer take on things. But I mean, it's true. It pushes their customers out of the risk curve. And they've already been pushed out the risk curve to trade more options and to trade more crypto. So this is a classic market's unintended consequence, which is why I would be surprised in the end if the SEC decided to go down this road.

BRIAN SOZZI: And then, while this is happening on payment for order flow, Myles, Bitcoin, other cryptocurrencies, is regulation. The hammer drops on that. And that's another big red flag for Robinhood.

MYLES UDLAND: Yeah, and well, the equity market is heavily regulated. The crypto market is going to be regulated of a sort. But we'll certainly kind of see how that evolves over time. But Bitcoin, 48,000. I guess it's fine for everybody there today. Let's go down to the floor of the New York Stock Exchange. What do we got here? Simplify Asset Management celebrating the anniversary of the Simplify US Equity Plus Convexity ETF.


MYLES UDLAND: Ticker is SPYC. What's in that one, Sozz?

BRIAN SOZZI: Well, I think they help make your investing life simple. So don't freak got.

MYLES UDLAND: We don't have enough time here to get the full perspectus going, but let's see what we can do. Seeks to track the large--

BRIAN SOZZI: That's it? They rang already? All right.

MYLES UDLAND: --US equity market while boosting performance during extreme market moves up or down via systematic options overlay. All right, that's great.

BRIAN SOZZI: I'm not a buyer.

MYLES UDLAND: So we're simplifying, ringing the bell. Well, look, you don't have to buy it. Someone else can buy it. So we'll leave it at that. All right, taking a look at the market as we open up here, we see all three majors are in the red, as futures had indicated.

Let's stay on the notion of single stock trading and a story that I know you're interested in, Sozzi, which is, PayPal exploring bringing stock trading into its ecosystem. And it starts to feel like any place that you can have your money, you think about a Square, Venmo is doing it with cryptocurrency, PayPal, which owns Venmo, thinking about maybe doing stock trading, anywhere you can have your money, people want to bolt on the possibility of you investing that money.

BRIAN SOZZI: Yeah, if you're a PayPal, why try to create something like this? Why not go out and buy, what, a Webull, Myles, or some of the other platforms and then just scale it up for there? But nonetheless, I mean, I'm not surprised. I mean, PayPal is trying to dominate-- they were leading in crypto, in the crypto market. They were one of the first companies, I think-- outside of Square, obviously-- to really embrace cryptocurrency.

Venmo-- you know, and this dovetails with a really interesting note out of Bank of America yesterday. Jason Kupferbeg looking at PayPal as a potential super app. Now I haven't heard the super app term used before. And I've heard it used before, usually as applies to Uber. But for a PayPal, it could be heading towards that super app status. Venmo is finally going to start to turn profitable likely next year. Users there continue to explode. Crypto, stock trading, might be the final piece of the puzzle here.

MYLES UDLAND: Yeah, I mean, it's, you know, on the one hand, it's obvious, right? If you have some amount of customers' money, you should enable other ways for them to keep that money with you, i.e. offer them opportunities to invest that capital. Of course, it's not quite so simple, though. I think part of the conversation around Robinhood and the opportunities that have been obviated in having customers trade stocks-- this goes back to the payment for order flow.

As a platform, it can end up being quite cheap for you to go and offer this capability because if you have enough trading on your platform, you have built in durable buyers of that flow, such that you can have a decent little business there standing up pretty quickly. And I think it's pretty clear that that's sort of what PayPal is seeing. And to your point about those acquisitions, aren't they just testing the water here? Right? Aren't they sort of saying we're open for business? If you'd like to call us and offer to sell yourselves at some kind of a discount or whatever, we're happy to make that deal.

BRIAN SOZZI: Yeah, you know, we'll just go back. Let me go back to the super app thing because I know our producer, Val. I mean, she's really on fire today in calling out really just how she's surprised by how much that Venmo app has grown. And it really has.

Let me put some numbers behind it from the folks at B of A, who put out this note yesterday. Venmo users could reach 120 million in 2023. In the second quarter, Venmo users tallied $76 million. I mean, that is massive growth. By 2023, Venmo revenues could be about $2.4 billion, about 6% of Paypal's business. So they don't have to get into stock trading. But they could. And at the same time, Venmo is really starting to turn into a beast of a revenue driver for the company and then, likely starting next year, a real big profit tailwind.

MYLES UDLAND: Yeah, I mean, if you're not enabling your customers to trade stocks in their free time, what are you enabling them to do, right?