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GOP Senator Toomey debuts bill to protect payment for order flow


Pat Toomey (Republican from Pennsylvania) addresses a press conference that introduced the Republican Infrastructure Plan, held at Washington’s U.S. Capitol on April 22, 2021.

Erin Scott | Reuters

Sen. Pat ToomeyThe legislation that will protect the controversial payment for orders flow (the main source of revenue to online brokerages such as e-commerce) will be introduced on Thursday Robinhood Markets

Securities and Exchange Commission Chairman Gary GenslerWall Street’s most powerful regulator, as well as a critic, has declared that reforming the payment for order flow is a high priority, following the stock market trading frenzy. GameStopThis year, earlier.

Toomey’s bill, specifically, would prohibit the SEC’s imposing an outright ban upon payment for order flow. Gensler said that he is considering this idea as part of his larger efforts to reform American practice.

Pennsylvania Republican Senator John McCain defended this practice to help develop investment apps and low-cost trading. He also argued for more efficient execution.

“New innovations—such as zero commission trading and user-friendly mobile apps—have allowed more Americans to participate in the stock market than ever before,” Toomey, the ranking member on the Senate Banking Committee, said in a press release. Payment for order flow has made it possible to develop such technologies.

Toomey and others argue that Robinhood’s payment for order flows allows them to provide trades without any upfront commissions. Robinhood’s zero-commission stock trades have helped millions of customers, many younger than their age, to make investments for the first time. They are also credited with a wider market participation in the U.S.

Robinhood’s competitors generate revenue from order flow payment, but this practice can have far-reaching consequences. Robinhood claimed that 81% its revenue from the payment for order flow was in its first quarter, according to a July filing.

Although the SEC has previously reviewed payments for order flow a number of times, it has so far reached an agreement with traders and brokers that this benefits small investors. This is a major concern for Gensler.

Other critics also believe that order flow payment creates a conflict for brokerages because brokers have two options: sell more volume to their clients or pass on the cash to the customers as lower trades.

One thing to remember is that Robinhood and other retail brokerage companies like Robinhood are limited in the number of high-speed trading firms available for execution of trades.

Citadel Securities is a high-speed trader, sometimes called a market maker. Citadel Securities handles approximately 27% U.S. equity trading volume, and 37% U.S. retail volume.

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Robinhood’s chief lawyer said last month that he believes the SEC will “arrive at the conclusion that payment for order flow is undoubtedly an amazingly good thing for retail investors and they’re not going to ban it.”

Gensler admits high-speed trading, as well as easy-to use apps, have made it easier and more affordable to invest. He warns against the dominance by a handful of market leaders, which could lead to less competition and more expensive trades for investors.

Retail investors are able to trade using commission-free brokerage platforms. Gensler, in prepared testimony from September stated that Telecommunications has facilitated high-frequency trading. “That was not the case even five years ago.”

He said that “almost half the volume traded is transacted in ‘dark pool’ or through wholesalers.” I believe that it is appropriate to examine ways to update the SEC’s rules in order to make sure our equity markets are consistent with our mission, efficient, and as competitive as possible.

Outside of the SEC’s analysis the chances that Toomey’s bill is made law soon in a Congress controlled largely by Democrats seem slim. Progressive lawmakers have encouraged Gensler to increase regulatory oversight, having been nominated by President Joe Biden to head the SEC.

Additionally, the Senate is uncertain if it will be able to consider the bill before the year ends, as Democrats plan on spending trillions and are facing a debt ceiling that could rise.