'Driving a casino effect': Stash CEO calls out payment for order flow as SEC unveils plan

·Senior Writer/Chief-of-staff
·4 min read

Brandon Krieg, the CEO and co-founder of the investment app Stash, called out related platforms that rely on payment for order flow (PFOF) and backed a government initiative to regulate the practice.

"The entire way that trading is happening right now in the market and how payment for order flow is working... [is] driving a casino effect where, you know, everyday Americans who don't know how to trade and don't have financial education supplied to them at school and from their parents are actively trading," Krieg told Yahoo Finance Live (video above). "And I want to understand how market structure will change to make it about the retail customer. The institutional customers and the hedge funds, they'll be OK, but I want to make sure that we're protecting retail investors."

On Wednesday, Securities and Exchange (SEC) Commission Chair Gary Gensler unveiled a plan to closely scrutinize PFOF and proposed an overhaul of how trades are executed and disclosed. In Krieg's view, having trading platforms be incentivized to maximize trading volume is the heart of the problem.

"Payment order flow has had a spiral effect where it just made it really, really easy to trade and actively trade," Krieg said. "I think that it does benefit, in a lot of ways, the market makers and the high frequency trading firms that benefit off more trading. Whereas, what I want to see is more retail customers thinking about the long term and investing slowly."

Lights flicker at the porte cochere at the closed New York-New York Hotel & Casino on May 8, 2020 in Las Vegas, Nevada. (Photo by Ethan Miller/Getty Images)
Lights flicker at the porte cochere at the closed New York-New York Hotel & Casino on May 8, 2020 in Las Vegas, Nevada. (Photo by Ethan Miller/Getty Images)

Krieg stressed that Stash's business model isn't built on trading activity, but rather uses a subscription model in which Stash's check is the same no matter how much its customers trade.

"I like the long term effects of wealth creation, not buying and selling a stock 17 times from the break room. I don't think that works," he said. "We don't drive active trading at all. Matter of fact, we've slowed down trading to put some guardrails around it."

This, of course, is a swipe at Robinhood, which underwent Congressional scrutiny following the meme stock frenzy — especially due to its pioneering PFOF business model that enabled free trading. Though the company has been criticized significantly for gamification of the stock market, Robinhood CEO Vlad Tenev has been adhering to a similar line to Krieg, frequently stating that "the vast majority of our customers engage in buy and hold activities and long term investing."

Robinhood's dwindling dominance

Robinhood's business model predominantly relies on payment for order flow and provides free trades to users, which has lowered the barriers to entry for individuals looking to trade stocks.

Along with the market's massive dip in March 2020 — as well as stimulus payments, lockdowns, and sports cancellations — Robinhood's innovation led more people to the stock market. This frenzy of new retail investors culminated in the "meme stock" market of early 2021, headlined by GameStop's (GME) meteoric rise.

Apptopia, an app insights firm, recently found that new installs of the most popular 15 investing apps for consumers — which include Robinhood (HOOD), Schwab (SCHW), and many others — were down 67% in April when compared to April 2021. (Robinhood IPO'd on July 29, 2021.)

Around 6.5 million people downloaded trading apps in April 2021. A year later, that number is hovering over the 2 million mark, according to Apptopia.

And while Robinhood has enjoyed huge download numbers over the past few years — 32.4% of all investing app downloads since January 2018 were Robinhood, according to Apptopia — up-and-comers like Stash have been taking market share.

In the company's Q1 earnings call, Robinhood CEO Vlad Tenev acknowledged lower trading volumes and decreased MAUs.

"While we were pleased to see strong net deposits and our lowest level of churn in years, we also saw decreased trading volumes, monthly active users, and assets under custody," he said.

According to Apptopia, Stash secured 15.4% of the space's downloads in April 2022. Apptopia also estimated that the trading apps Public.com, SoFi (SOFI), and TradeStation have seen downloads grow 161%, 99% and 52% year over year growth in Q1, respectively.

Adam Blacker, VP of Insights at Apptopia, noted out that the rise of mobile-first investment apps clearly led to noticeably lower performance of traditional players of the space like Fidelity, TD Ameritrade, E*Trade, Schwab, and Ally.

That said, these gains against traditional players hold over the long term is another question.

"Even though mobile-first apps were superior in retaining user engagement, they have seen new user growth decrease at a more rapid rate than their traditional counterparts," Apptopia's report stated.

Ethan Wolff-Mann is a Senior Writer and Chief of Staff at Yahoo Finance. When he is reporting, he focuses on investing, consumer issues, and personal finance. Follow him on Twitter @ewolffmann.

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