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Today, Robinhood (NASDAQ:HOOD) stock is down 6% on news of proposed rule changes from the SEC.
It has been an absolutely abysmal year for investors in HOOD stock. From its peak of $85, shares have sunk to around $8.5o per share today. This move represents 90% downside from its peak, one of the most incredible moves among large-cap stocks on the Nasdaq this year.
Todays’ move lower in HOOD stock comes after the SEC announced proposed changes to how the stock market operates. These rule changes would require brokerages like Robinhood to send orders to be auctioned to various trading firms. This would allow for increased competition for orders and improved prices for small investors and public companies.
These regulatory changes seem to make sense, at least from a high level. By making the market more efficient, all market participants stand to better share in the gains of rising equity prices over time. However, it seems that the HOOD stock price disagrees with this view.
Let’s dive into why HOOD investors aren’t cheering on this announcement.
What Do SEC Rule Changes Mean for HOOD Stock?
Robinhood’s business model relies on payment for order flow. This controversial practice involves the selling of buy or sell order data to wholesalers, who can in turn allow high-frequency trading firms and others to front run trades. In layman’s terms, this means the “little guy” gets nickel-and-dimed on transactions, with Robinhood receiving a fee for every order sent to said wholesaler.
For Robinhood, one of many brokerages providing zero-cost trades, this is how business is done. But the proposed SEC rule changes could completely change the game. Being forced to charge fees may turn off many small investors from the platform. And given Robinhood’s ability to attract first-time investors with zero-cost trades, the move toward fee-based trades may significantly hamper its ability to acquire new customers.
Overall, Robinhood’s core business has been hit hard this year, due to a range of both macro and company-specific factors. This is simply the latest headwind HOOD stock investors are pricing in.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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