SEC says brokers enticed by payment for order flow are making trading into a game to lure investors

This article is about HOOD

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According to the Securities and Exchange Commission, online brokerages are using controversial industry practice of payment-for-order flow to increase their revenue and make stock trading fun. This is to attract retail investors. Wall Street's top regulator released Monday its much-anticipated report on the GameStop mania earlier in the year. The report, which consists of 44 pages, detailed the downturn in trading and highlighted a few issues such as back-end payments brokerages receive, gamification, and disclosures about short sales. It did not assign blame to any one cause.

According to the SEC, "Payment for order flows and the associated incentives may encourage broker-dealers into finding novel ways to increase customer trades," SEC officials stated in the report. Robinhood, a millennial-favorite stock trading app, has one of its largest revenue streams. It was first listed in August. However, the practice is now under scrutiny because many believe it creates a conflict of interests with brokerages being incentivised to send orders directly to the market-maker who pays them the highest rebate. Gary Gensler, the chair of the SEC, warned that this practice should be banned. Robinhood was one of the brokers that made trading more fun by making their platforms look appealing and offering game-like features like leaderboards, points, rewards and bonuses. Robinhood ended its confetti animation after much criticism. The report stated that investors should consider whether games-like features or celebratory animations, which are likely to generate positive feedback from trading, encourage them to trade more than they otherwise would. The SEC review did not make any concrete recommendations or lay the foundation for possible changes in U.S. trading practice. The agency didn't conclude whether the trading restrictions and trading were manipulative or whether brokerages followed the rules during the mania. The agency acknowledged that extreme volatility in meme stocks had tested the market's resilience and capacity.

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