Robinhood, Charles Schwab dip with Gensler stock-trading proposal

SEC Chair Gary Gensler on Wednesday announced proposed changes to overhaul the controversial practice of "payment for order flow" that was at the center of the meme stock mania last year.

Why it's the BFD: PFOF is a major part of the business at brokerages like Robinhood and market makers like Citadel. Overhauling the practice would force such companies to reconsider the very basis of their business models.

A quick refresher: In PFOF, brokerages send their orders to wholesale brokers under the assumption wholesalers can execute at a better price. Critics argue that wholesalers have an incentive to bolster their own earnings rather than finding the best price for the end trader.

• Notably, these wholesalers generally make money off such trades by taking the difference between the offer and the bid.

Details: Gensler's new rules could force the wholesalers to compete for retail trades in more transparent, public auctions.

Driving the news: Shares of Robinhood slipped 4% on the news while Virtu dropped 2% on Wednesday. Charles Schwab — which received the most PFOF payments last year among the brokerages — also dropped 3%.

What they're saying: Brokerage startups that, like Public.com, have done away with PFOF cheered the move.

• Robinhood chief legal officer Dan Gallagher also had a measured official statement: "We look forward to reviewing the Commission’s eventual rule proposal and engaging with the SEC during a meaningful notice and comment rulemaking process.”
• But, at a Piper Sandler conference on Wednesday before Gensler released details of his proposal, Gallagher appeared to be far more candid, saying, “It is a really good climate for retail, so to go in and muck with it right now, to me, is a little worrisome."

What we're watching: More formal proposals are expected this fall, per Bloomberg. Expect blood.