Powell prescribes more pain + Trouble ahead for HOOD
A quick fix of the latest financial happenings.
Good morning, investors!
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Without further ado…
Powell Prescribes More Pain
The markets are desperate for scraps of good news. When inflation came in lower than expected at 7.1% (which is still concerningly high) versus expectations of 7.3%, stocks bounced.
After raising rates by another 50 bps, Powell and the rest of the Federal Reserve Board dashed any hopes of a pivot from the current plan for rate hikes. Powell made that clear at his press conference on Wednesday:
“I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2% in a sustained way.”
“We think that we’ll have to maintain a restrictive stance of policy for some time. Historical experience cautions strongly against prematurely loosening policy.”
The Fed’s projections now point toward a median fed funds rate of 5.1% in 2023 — up from 4.6% in September and 3.8% in June. Real GDP forecasts for next year slipped too, from 1.2% in September down to 0.5%.
Trouble in the NeighborHOOD
On Wednesday, the SEC voted to impose new regulations on market middlemen, such as Citadel Securities and Virtu Financial. These regulations could significantly restrict the profitability of payment for order flow (PFOF).
We’ve discussed PFOF before, so here’s some helpful context from a prior issue of DD:
Market makers are firms that continuously quote both sides of a transaction: the price they’re willing to pay for a stock (i.e. the bid) and the price they’re willing to sell a stock for (i.e. the ask). The difference between the two prices is known as the bid-ask spread. These firms are integral to the investing process because they help keep markets liquid.
When retail investors make trades through a broker (such as Robinhood), the broker sends orders to a market maker to execute the trades. In exchange, the market maker pays the broker a rebate for the volume activity (and, indirectly, insight into buy/sell orders). The rebate is based on a percentage of the bid-ask spread. This is how the PFOF model works.
PFOF is not illegal, rare, or exclusive to Robinhood’s business. Since commission-free trades are the norm, other firms use this model too. However, there are inherent problems with the PFOF model — problems that could jeopardize its legality down the road.
The proposed laws are sort of a middle-ground between outlawing PFOF and treating it like business as usual. Here’s a snippet from a Wall Street Journal article on the matter:
The centerpiece of the SEC’s plans is a proposal for brokers to send many small-investor stock orders into auctions. This would enable a mix of high-speed traders and institutional investors such as hedge funds or pension funds to compete to fill the orders, with the idea that investors would get better prices as a result—higher prices if they are selling shares, or lower prices if they are buying.
Long story short, this auction mechanism could help investors get better prices and, in turn, lower the profit earned by market makers and brokerages.
You can read the rest of the WSJ article here.
Three Eye-Opening Tweets
And finally, we close with three eye-opening tweets.
Canada is unstoppable.
You heard the man.
EV penetration forecasts take a hit.
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