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Gary Gensler, chairman of the Securities and Exchange Commission, said Monday that a ban was “on the table” for a practice that underlies some of the most popular free stock trading apps.
Mr Gensler told Barron’s in an interview that he would consider banning “payment for order flow” – the practice in which large trading operations pay to execute trades for clients of brokerage firms. retail, such as Robinhood.
The arrangement is at the heart of how Robinhood and some of its competitors, including E-Trade and Charles Schwab, organized their businesses to offer commission-free transactions – a crucial factor in the rush of millions of ordinary people to the market. scholarship holder.
Large trading operations, including Citadel Securities and Virtu Financial, which execute the orders make tiny profits on those trades, and the huge user base of commission-free brokerage firms means those tiny profits can quickly add up.
Mr Gensler told Barron’s that the practice has “an inherent conflict of interest” because the companies that execute the transactions can benefit from this information.
“They get the data, they get the first look, they can match buyers and sellers from that order flow,” he said.
Over the past few months, Mr Gensler has made a series of statements saying he is looking closely at the practice and is open to a wide range of regulatory options. He ordered the agency to look into the matter shortly after his confirmation; the review is still ongoing.
Robinhood highlighted comments from CFO Jason Warnick as the company prepared for its IPO this year. “We believe that paying for the order flow is a better deal for our customers than the old commission structure,” he said at the time. On a call to investors earlier this month to discuss quarterly earnings, Robinhood officials said that while they had not planned an outright ban on payments for the flow of orders, their sources of income were diverse and could easily resist such a decision.
The Citadel did not immediately comment. Virtu declined to comment.
Consumer advocates and others have criticized the practice, complaining that it can give large business transactions an edge.
Banning it would be a welcome development, said David Lauer, managing director of data analytics firm Urvin.ai and a former high-frequency securities trader.
“It is an intractable conflict of interest,” he said. “Brokers can’t get around it.”
But, he said, ending the practice wouldn’t necessarily mean the end of free stock trading: Companies like Fidelity already offer free trades without using the payment system for orders.
Robinhood shares ended the day down nearly 7%. Shares of Virtu Financial also fell after the publication of Mr Gensler’s comments, ending the day down almost 4%.
Matthew Goldstein, Kate kelly and Tara Siegel Bernard contributed report.
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