BofA bearish on Robinhood, Schwab after SEC proposed to review stock market structure

Bank of America analyst Craig Siegenthaler took a bearish view of Robinhood Markets on Friday (NASDAQ: CAP) and Charles Schwab (NYSE: BLACK) such as the Securities and Exchange Commission’s proposals last week to review the structure of the stock market bodes poorly for payment-for-order flow-sensitive brokers.

The proposals are viewed as “net negative” for the two companies and “neutral/slightly negative” for Nasdaq (NASDAQ:NDAQ) and intercontinental exchange (NYSE:ICE), the analyst wrote in a note.

The Wall Street watchdog identified proposals that would affect order routing, pricing and disclosures that brokers must make to clients. And while not intended to ban the process entirely, the proposals put pressure on firms engaged in PFOF, the compensation brokers receive from market makers in exchange for routing trades.

In Siegenthaler’s baseline scenario, the proposals represent a 1% earnings per share for Schwab (SCHW) and Robinhood (HOOD) and a 2% revenue headwind for Robinhood. If all proposals pass, he expects a 7%-9% drop in HOOD revenue. The Quant system gave HOOD a profitability rating of “F” with the worst numbers in net profit margin, return on common stock and cash from operations.

“We believe that the 70% reduction in admission prices will likely outweigh the positive impact on operating profit from higher trading volumes,” the note said. That said, “discounts will drop significantly, resulting in adverse downstream impacts for SCHW/HOOD.”

In Friday morning trading, HOOD dipped 1.1%moved SCHW 0.3%tapped NDAQ down 0.1% and ICE won 0.1%.

Looking for Alpha Contributor Acutel marked Robinhood stock as a strong sell while noting the trading app’s weakening fundamentals.