Shares of Robinhood fell on Tuesday (Aug. 31) after the Securities and Exchange Commission (SEC) Chairman Gary Gensler indicated that he is mulling a full ban of payment for order flow, a method that yields the majority of the online trading platform’s revenue, according to a report in Barron’s and other news outlets.
Payment for order flow is a controversial practice that compensates stockbrokers for routing trades to a particular market maker. The policy is considered a kickback, and Gensler is considering an outright ban on the practice.
Gensler said that a full ban of payment for order flow is “on the table.” He pointed out that the U.K., Australia and Canada don’t allow the practice.
“They get the data, they get the first look, they get to match off buyers and sellers out of that order flow,” Gensler told the news outlet. “That may not be the most efficient markets for the 2020s.”
The practice also carries with it “an inherent conflict of interest,” Gensler said, adding that market makers may just get a small spread on each trade but reap benefits that go beyond that aspect.
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The SEC is now in the midst of doing a deep dive into the practice and expects to present proposals in the months ahead.
“Also on the table is, how do we move more of this market to transparency?” Gensler said. “Transparency benefits competition and efficiency of markets. Transparency benefits investors.”
Other issues are also being considered by the SEC, with payment for order flow just one aspect of a bigger problem with the way the market is structured, Gensler said.
He pointed to the fact that roughly 50% of trading happens in dark pools — an alternative trading system — or are internalized by companies, thus keeping trades off exchanges.
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“It provides an opportunity for the market maker to make more, and for ultimately the investing public to get a little less when they sell or have to pay more when they buy,” Gensler told Barron’s. “I think it also affects companies raising money” since it could be an obstacle to “fair, orderly and efficient markets.”