GOP Senator Toomey debuts bill to protect payment for order flow

Senator Pat Toomey will enact laws Thursday to protect a controversial practice known as paying for the flow of orders, which is the primary source of income for online brokers like Robinhood Markets.

Securities and Exchange Commission chairman Gary Gensler, Wall Street’s top regulator and a critic of the practice, made order flow payment reform a top priority following the frenzy of stocks like GameStop earlier this year.

In particular, Toomey’s bill would prevent the SEC from imposing an outright order flow payment ban, an idea Gensler is considering as part of his broader effort to reform US practice

The Pennsylvania Republican defended the practice for helping develop new investment apps, inexpensive trading, and more efficient execution.

“New innovations – like commission-free trading and easy-to-use mobile apps – have enabled more Americans to participate in the stock market than ever before,” Toomey, the senior member of the Senate banking committee, said in a press release. “Such technologies were made possible in part by paying for the flow of orders.”

Proponents like Toomey say that paying for order flow allows Robinhood and other online brokers to offer trades with no upfront commission fees. These commission-free stock deals helped Robinhood attract millions of younger customers first-time investments and are being credited for wider market exposure in the United States

Many of its competitors also earn income from paying for the order flow, although the practice has an oversized impact on Robinhood. In a government statement released in July, Robinhood said 81% of its revenue in the first quarter came from paying for the flow of orders.

The SEC has previously checked the payment for the order flow several times and has so far agreed with brokers and traders that it will benefit small investors, a main concern of SEC chief Gensler.

He and other critics argue that paying for the order flow creates a conflict of interest for brokers as brokers can either earn more by selling their clients’ order volume or pass that money on to clients in the form of cheaper trades.

Those who are cautious about paying for order flow, or PFOF, also note that there are few large high-speed trading firms doing business for clients of retail brokerage firms like Robinhood.

One such high-speed trading company, also known as a market maker, is Citadel Securities. This one company handles 27% of US stock trading and 37% of all US publicly traded retail.

Robinhood’s chief legal officer said last month that he believes the SEC “will conclude that paying for the flow of orders is undoubtedly an amazingly good thing for retail investors and they will not ban it.”

Gensler admits that high-speed trading and easy-to-use apps have made investments both cheaper and more popular. But the dominance of a few large market makers, he warns, could restrict competition and lead to more expensive trades for the average investor.

“Small investors can trade via commission-free brokerage apps. Telecommunications have changed the speed of high-frequency trading,” said Gensler in a prepared statement in September. “That wasn’t the case a few years ago.”

Still, “almost half of the volume of transactions is carried out in ‘dark pools’ or by wholesalers,” he added. “I feel it is appropriate to look into ways to refresh the SEC rules to ensure that our stock markets reflect our mission and are as efficient and competitive as possible.”

Outside of SEC analysis, the chances of Toomey’s bill going into effect anytime soon in a Democratic-controlled Congress appear slim. Gensler, who was named head of the SEC by President Joe Biden, has been encouraged by progressive lawmakers to step up regulatory oversight.

With Democrats poised to pass trillions in spending, face a looming debt ceiling, and poised to review a list of new candidates for the Federal Reserve, it’s unclear whether the Senate could consider the legislation before the end of the year.