Payment for order flow creates a 'casino effect,' Stash CEO says

Stash CEO & Co-Founder Brandon Krieg joins Yahoo Finance Live to discuss expectations for the SEC's changes to payment for order flow and the outlook for the fintech industry.

Video Transcript

- FCC Chairman Gary Gensler is expected to speak today possibly announcing some new regulations surrounding payment for order flow. This may carry long-lasting impacts on small brokerages and potentially investors. So for more on what it could mean for the fintech industry let's welcome in Brandon Krieg who is the Stash CEO and co-founder. What will you most notably be listening for that actually moves forward regulation? And what should investors be paying close attention to?

BRANDON KRIEG: Yeah, well, first, it's nice to be here. I cannot wait to listen to this today. I'm very excited. I totally geek out on market structure. And I think Gary Gensler's speech today will be really important because it all comes down to the retail investor.

The entire way that trading is happening right now in the market and how payment for order flow is working, in some ways, it's driving a casino effect where, you know, everyday Americans who don't know how to trade and don't have financial education, uh, supplied to them at school and from their parents are actively trading. 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. So I really hope that the bias towards the action of Gary Gensler is to further protect the retail investor.

- Brandon, good to see you again. It's been a while. So is another way of looking at this that payment for order flow is just benefiting wealthy investors?

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

So I think about the market long term. I think over the last couple of years we moved into this mode where Wall Street, in a lot of ways, has become-- in some ways, a casino and I don't like that. You know, 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. So 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.

- Brandon what have you seen amongst your customers? Uh, the markets continue to be under pressure, a lot more volatility. This has really hit the average investor very hard.

BRANDON KRIEG: Yeah, it has. And I have to say I'm really proud of Stash's success and what's going on now. Where a lot of the mark and a lot of our competitors have had negative growth last quarter, we actually grew subscribers. And a lot of that comes from the business model that we built at Stash, which is we 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 be doing or aren't good for you. At Stash we can help you open a retirement account, invest for your children, banking, get stock back as a reward for spending.

And these types of things play into the long-term wealth effect. And I think that for Stash, I think we're doing great. I think the casino, kind of, mindset in the market is being corrected now and you're seeing it.

- Well, price drops have a way of correcting, I suppose, a way risky behavior. But Brandon, what you're talking about in terms of a long-term versus a short-term mindset, there's always been a short-term mindset in the market. There's always been people playing that role. I, sort of, fail to see how the new SEC regulations that are being talked about would do anything to take that away or diminish it. It more has to do with the structure in the back end, right?

BRANDON KRIEG: Yeah. I mean, look, for me they're, kind of, two separate things. I don't really play in the active trader space at all, so payment for order flow for Stash is not a thing. Like, we don't drive active trading at all. Matter of fact, we've slowed down trading to put some guardrails around it.

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've always thought about, you know, where edge comes from in the market and how the retail customer ultimately should always be getting the best price. So I don't know how all this plays out quite frankly, but what I do know is that I want to see all the rules be biased towards the retail customer. And even if they decide to actively trade, I want them to get the best price always. That's the most important thing and not give up edge to anybody else.

- If payment for order flow is shaken up, Brandon, this zero cost to trade model that many platforms have benefited with over the past-- or from the past few years, does that go away?

BRANDON KRIEG: No, I think there's always ways to keep trading at a very, very low cost. It really comes down to how the exchanges-- if the order flow goes back to exchanges. I mean exchanges forever and ever have had models where there's maker-taker where you can get a rebate to add liquidity and pay to take liquidity. In a lot of cases, that rebate hasn't been passed back to the consumer. It's been kept by the broker.

So I don't know. We'll have to see. Maybe I'll come back in a month and I'll comment on what Gensler says today. Because I really do think that there's a lot going on here and we have to see how it gets unpacked. I just don't know yet, like what all this will look like.

- All right, we'll leave it there. Brandon Krieg, Stash co-founder and CEO. Good to see you. Maybe we'll be talking to you soon about your potential IPO. We'll leave it there for now, though.

BRANDON KRIEG: All right. Cool.