Shares of Robinhood Markets (NASDAQ: HOOD) and Virtu Financial (NASDAQ: VIRT) surged in pre-market trading on Thursday after a Bloomberg Law report that the U.S. Securities and Exchange Commission (SEC) will not ban Payment-for-Order-Flow (PFOF).
The report stated that this will be counted as a win for brokerages like HOOD and VIRTU that “get paid for processing rights.”
What are PFOFs?
PFOFs are customers’ orders sent by retail brokerages to wholesale brokerages, rather than exchanges. This is because wholesale brokerages execute the orders at a slightly better price than exchanges.
Retail brokerages like HOOD accept payments and rebates from wholesalers in exchange for their customers’ orders. As trading volumes are surging, retail brokerages are earning most of their revenues from PFOFs.
HOOD had stated in its quarterly SEC filing that since a majority of its transaction-based revenue comes from PFOF, a ban on this payments-for-order flow could result in reducing the company’s profitability.
As a result, the SEC stopping short of banning PFOFs could stand to profit retail brokerages like HOOD.
What is a Good Price for HOOD Stock?
Wall Street analysts are sidelined about HOOD with a Hold consensus rating based on three Buys, four Holds, and three Sells. Further, HOOD’s average price target of $11.80 implies upside potential of 15.5%.