Up markets, down markets – there’s always a stock moving somewhere, and often enough it’s moving under the radar. That’s why I share my watch lists.
This week’s list, though, is a little shorter than most, because right now, it’s all about one stock.
This company has played a bigger and bigger role over the past two years. It’s not quite systemically important, like the TBTF banks, but it’s been the doorway to wealth for millions of people.
I really want to watch how it trades over the next few sessions, and I think you should, too. We’re getting close to “go time,” when it’ll be time to leap on the stock, so here’s the level to look for – and a trade idea that could get you in at an even better price…
All Good in the HOOD?
Robinhood Markets Inc. (NASDAQ: HOOD) had a less-than-smooth first month of trading after its IPO in July. It started off well enough, when the stock rocketed more than 105% in the first few trading sessions only to drop more than 30% in a trading day. The stock has been drifting lower since August 24, but the selling accelerated following an unusual interview last week.
U.S. Securities and Exchange Chair Gary Gensler, speaking to Barron’s magazine, said the watchdog may consider banning the practice of payment for order flow (PFOF). Robinhood has already found itself in regulatory crosshairs as the posterchild for PFOF, not to mention the “gamification” of investing and trading.
If you haven’t heard of PFOF, you will. It’s Robinhood’s bread and butter, and how it, Fidelity, Charles Schwab, and TD Ameritrade can provide commission-free trading.
In a nutshell, the discount brokerages provide a customer-facing platform whereby you can place your trade orders and the back office of the brokerages handles the money vs. securities transaction.
But none of these brokerages are trading shops, which means they’re not taking customer orders and matching them up with buyers and sellers, which is to say they’re not “market makers.”
To match buyers with sellers, all of the discount brokerages rely on wholesalers (which are third-party trading shops) to execute those orders on behalf of the discount brokerages’ front-facing customer operations. In return, the wholesalers pay the discount brokers for the order flow, and that’s how the discount brokers can offer free trading.
This has helped fuel the revolution in retail trading, ushering in a new era of democratized moneymaking for the masses.
Now, in a post-GameStop world, the SEC seems to have decided to go after the “inherent conflict of interest” between these wholesalers and the discount brokers.
The wholesalers, who ultimately make the market for your trade, see all the order flow, in advance of filling your trade. That means they have the ability to put on short-term trades – ahead of filling your order – that could benefit from the order flow they’re about to fill.
In essence, the wholesalers are allowed to legally front-run your order. At least for now.
I could say a lot more about PFOF, and all its implications, but this week, Robinhood’s the focus. If payment for order flow is curtailed in any meaningful way, it’ll hit the top and bottom lines for all the retail brokerages that rely on it to generate revenue that compensates for those commission-free trades.
Robinhood must have a crystal ball in the C-suite because it’s already indicated – in its IPO roadshow, no less – that it could become its own market maker, which would cut the wholesalers out of the equation completely.
Here’s How and Why to Play Robinhood
If Robinhood does become its own market maker, it would basically pay itself for order flow. That would immediately give Robinhood a huge leg-up on the other discount brokerages.
It’s still way too early in the game to speculate about meaningful changes to how payment for order flow operates… but I don’t think that’s going to stop pundits from speculating and pontificating. I’m expecting a lot of chatter about PFOF, which will in turn cause waves of volatility in the discount brokerage space.
Frankly, that’s going to scare some people away, but I see this as an opportunity, specifically when it comes to HOOD stock; I think Robinhood will ultimately win out if there are significant changes to PFOF.
Robinhood stock isn’t far away from a key support level – and entry point – at $42. I like it there, and that’s where I’d buy. If it trades down to $42 over the next four weeks, I say buy to open a HOOD Nov. 12 2021 $43/$44 call spread for $0.40 or less. Exit the spread when profits hit 100%.
I’ve got some even bigger profit potential in mind for my subscribers. I’m running down a list of stocks most people never hear about. They’re practically “blacklisted,” in fact. That’s a shame, because the class of stocks on this list has been shattering records and delivering some of the market’s biggest gains. Top, exceptional performers here have seen peak returns like 2,953%… 4,801%… 12,754%… even 22,207% in less than a year. Tapping this corner of the market could hand you massive profits this year, and I can show you how…
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About the Author
Browse Shah’s articles | View Shah’s research services
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor’s 100 began trading on March 11, 1983, Shah worked in “the pit” as a market maker.
The work he did laid the foundation for what would later become the VIX – to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd’s TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company’s “listed” and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah’s vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story – when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business’s Varney & Co.
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