Public Stock App Stops Payment for Order Flow, Accepts Tips as Rev Model
Learning the lesson from Robinhood’s interception of short-squeezing for the little guys, new financial models have to be developed. As Decentralized Finance (DeFi) continues to evolve, the traditional stock trading model still has room for tweaks. Public paves this path toward trustworthiness in the form of tipping.
Robinhood Unveils How the “Free” Stock Sausage is Made
With the short-squeezing of GameStop coming to its predictable end, it is time to take stock of the hectic events in the past couple of weeks. As of today, GME stock still soars well above its fundamentals, at ~$100, but this is a low mark from February 1st, at ~$326, representing a 70% drop.
Nonetheless, Reddit’s WallStreetBets mobilization pumped the GME stock for long enough and high enough to incur major losses to big Wall Street hedge funds. Melvin Capital alone, with $13.1 billion assets under management (AUM), suffered up to 53% loss during January to cover its short positions on GME. This prompted its fellow hedge funds, Citadel and Point72, to jump in and bail it with a $2.75 billion injection.
Without going into the more detailed timeline of the events, and regardless of the GME stock performance in the near future, the sausage-making of stock trading has been revealed for all to see:
- Robinhood, a company hailing itself as a democratizing force in finance not only ended up restricting up to 50 stocks but engaged in selling people’s positions without their consent.
- This unveiled the role of Citadel, which is not just any hedge fund. Outside of bailing Melvin Capital, the main GME shorter, and giving current treasury secretary Janet Yellen $800,000 in “speaking fees”, Citadel is also the market maker Robinhood uses for the bulk of its income.
- After effectively sabotaging GME trading, among other stocks, Robinhood broke a record in its funding – having received $3.4 billion. While Robinhood frames this new investment threshold as critical for its democratizing mission, others would say it’s a reward for services rendered.
Needless to say, this unholy alliance highlighted the naivety of fair play in the “free market”. At every level, a hidden leverage of power waits to be activated in case the entrenched interests are threatened. In other words, when something is conveniently free, it almost always means that you are the product.
Can the Trust in Stock Trading Be Rehabilitated?
When looking at it at face value, payment for order flow is one of the most questionable financial practices in the market. The Robinhood-Citadel relationship brought it to public awareness like never before. In exchange for fulfilling retail trades, brokerages such as Robinhood form a partnership with market makers – Citadel – which then pay rebates for these order flows, representing bid-ask spreads.
However, seeing the trustworthiness gap in the system wide open, this opens an opportunity for other companies to step in. Hopefully first of many, Public has recently announced it will stop the practice of Payment for Order Flow (PFOF).
“ANNOUNCEMENT: To better align our incentives with those of our members, we will stop participating in the practice of Payment for Order Flow.”
Instead, Public is deploying an alternative income generation in the form of tipping. This represents the balancing act between remaining commission-free while also removing an acute conflict of interest. All Public account holders will have an option to tip at a minimum of $1 in order to prevent Robinhood-like shenanigans.
If we go by to the success of microtransactions in free-to-play video games, which tend to generate the most income, the concept of tipping draws from the same psychological well. As people become more aware that nothing is really free, tipping participation in stock trading should prove to be more than a viable business model.
Would you be willing to participate in tipping to ensure brokerages can avoid conflict of interest? Let us know in the comments below.