Order flow payment creates ‘casino effect’, says Stash CEO


Stash CEO and co-founder Brandon Krieg joins Yahoo Finance Live to discuss expectations for SEC changes to payment order flow and outlook for the fintech industry.

Video transcript

FCC Chairman Gary Gensler is expected to speak today to possibly announce new regulations regarding payment for order flow. This can have lasting effects on smaller brokerages and potentially on investors. So, for more on what this could mean for the fintech industry, let’s welcome Brandon Krieg who is the CEO and co-founder of Stash. What will you listen to most in particular to advance the regulations? And what should investors pay special attention to?

BRANDON KRIEG: Yes, well, first of all, it’s nice to be here. I can’t wait to listen to this today. I am very excited. I’m totally geeky about market structure. And I think Gary Gensler’s speech today will be really important because it all comes down to the retail investor.

The whole way that trading is going on in the market right now and how the order flow payment works, in some ways, has a casino effect where, you know, ordinary Americans who don’t know how to trade and don’t have the financial education, um, that was provided to them in school and by their parents is actively trading. And I want to understand how the market structure will change to accommodate the retail customer. Institutional clients and hedge funds will be fine, but I want to make sure we protect retail investors. So I really hope the bias towards Gary Gensler’s action is to further protect the retail investor.

Brandon, good to see you again. It’s been a long time. So, is another way of looking at this that order flow payment only benefits wealthy investors?

BRANDON KRIEG: No, I think the payment order flow kind of had a spiral effect where it just made it really, really easy to trade and active trade. At Stash, we focus on long-term investing. So I can give anyone in the market, and especially as a regulated company, a guarantee that the market will go up and the market will go down. It is a guarantee.

So I’m thinking of the long-term market. I think in the last couple of years we’ve gone into this mode where Wall Street in many ways has become – in some ways a casino and I don’t like that. You know, I like the long term effects of building wealth and not buying and selling stocks 17 times from the break room. I don’t think it works. So I think that in many ways benefits market makers and high frequency trading firms that benefit from more trading. Whereas what I want to see is more retail clients think long term and invest slowly.

Brandon, what have you seen among your customers? Um, the markets continue to be under pressure, much more volatility. It really hit the average investor really hard.

BRANDON KRIEG: Yes it is. And I have to say I’m really proud of the success of Stash and what’s happening now. Where much of the brand and many of our competitors experienced negative growth last quarter, we actually grew subscribers. And a lot of that comes from the business model that we’ve built at Stash, which is we’ve built a subscription model.

The model is not built on transactional activity. So at Stash, we don’t need you to trade more, spend more, do more things that you probably shouldn’t do or that aren’t good for you. At Stash, we can help you open a retirement account, invest for your kids, bank, get back stocks as a reward for spending.

And that kind of stuff plays into the long-term wealth effect. And I think for Stash, I think we’re doing really well. I think the casino mindset in the market is being corrected and you can see it.

Well, price cuts have a way of correcting, I suppose, risky behavior. But Brandon, what you’re talking about in terms of a long-term mindset versus a short-term mindset, there’s always been a short-term mindset in the market. There have always been people who have played this role. Somehow, I don’t see how the new SEC regulations being talked about would do anything to remove that or diminish it. It has more to do with the structure at the back, doesn’t it?

BRANDON KRIEG: Yeah. I mean, look, to me, those are kind of two separate things. I don’t play in the active trader space at all, so order flow payment for Stash isn’t a thing. For example, we do not conduct active trading at all. In fact, we’ve slowed down trades to put guardrails around them.

But as someone who’s been in the market for 24 years– and I started in 1998 as an electronic trader when electronic trading wasn’t really a thing– so I always thought, you know where the advantage in the market comes from and how the retail customer should ultimately always get the best price. So I’m not quite sure how this all happens, but what I do know is that I want all the rules to be skewed in favor of the retail customer. And even if they decide to actively negotiate, I want them to always get the best price. This is the most important thing and not giving someone else the advantage.

If payment order flow is shaken, Brandon, that zero cost model for trading that many platforms have enjoyed over the past or the past few years, does that go away?

BRANDON KRIEG: No, I think there are always ways to continue trading at a very, very low cost. It really depends on how the exchanges – if the order flow returns to the exchanges. I mean exchanges have always had models where there is a maker-taker where you can get a discount to add liquidity and pay to take liquidity. In many cases, this reimbursement was not returned to the consumer. It was retained by the broker.

Then I do not know. We will have to see. I may come back in a month and comment on what Gensler said today. Because I really think there’s a lot going on here and we have to see how it unfolds. I don’t know yet, what it will all look like.

All right, we’ll leave it at that. Brandon Krieg, co-founder and CEO of Stash. Happy to see you. Maybe we’ll talk to you about your potential IPO soon. We’ll leave it at that for now, though.



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