Robinhood and Market Makers Oppose SEC's 2025 Trading Reforms Impacting Stock Prices

Robinhood (HOOD) and key market makers like Virtu Financial (VIRT) have voiced strong opposition to the U.S. Securities and Exchange Commission's (SEC) newly proposed trading regulations, marking the most significant shift in market oversight in over ten years.

Since the announcement, shares of both Robinhood and Virtu have dropped by more than 7%, with Virtu experiencing its steepest intraday fall since April.

Highlights of the SEC's Proposed Rules

• The SEC has introduced two new rules targeting payment for order flow (PFOF), a key revenue source for Robinhood and market makers.
• These rules are part of a broader package representing the largest regulatory overhaul of stock trading in over a decade.
• One rule mandates enhanced disclosure from brokers regarding how they secure the best trade execution when receiving PFOF.
• The other requires retail investor orders to be auctioned publicly before execution by market makers under PFOF agreements.

The reforms specifically address PFOF, a practice allowing brokers like Robinhood to offer commission-free trades by routing orders to market makers who pay for this flow. The SEC estimates that introducing public auctions could save retail investors approximately $1.5 billion annually, equating to a 1.08 basis point reduction in trading costs.

Robinhood’s deputy general counsel, Lucas Moskowitz, criticized the proposals, stating they risk reinstating barriers to market entry and harming millions of retail investors. He also highlighted concerns over the 60-day public comment period being insufficient for such complex changes.

Conversely, some retail investor advocates argue the SEC should go further by banning payment for order flow entirely.

The SEC assures that commission-free trading will likely remain intact despite restrictions on PFOF, noting that many large brokerages generate revenue through alternative avenues such as margin lending and securities lending.

Public exchanges like the New York Stock Exchange's parent company Intercontinental Exchange (ICE) and Nasdaq (NDAQ) are expected to benefit from the introduction of execution auctions.

SEC Chair Gary Gensler emphasized the need for increased transparency, stating, "Markets have become increasingly opaque, especially for individual investors who are deprived of the full benefits of competitive execution at optimal prices."

Among the other proposed rules, one seeks to standardize stock price increments by reducing tick sizes to a tenth of a cent and requiring market makers to match these increments, potentially impacting their trading strategies. Another rule aims to broaden disclosure requirements on stock pricing data for brokerages with over 100,000 clients.

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