Senator Pat Toomey, the ranking member on the Senate Banking Committee, has introduced legislation designed to protect payment for order flow – the legal practice where firms pay to process trades collected by broker-dealers. The practice has garnered scrutiny due to its utilization by Robinhood, a digital investment platform that is able to provide commission-free trading because of the practice.
Earlier this year, the Securities and Exchange Commission has indicated it would be investigating the practice which could result in a ban. SEC Chairman has publicly stated he believes there may not be sufficient competition in the payment for order flow market.
The language of the bill is simple as it creates a law that bans any prohibition from the practice:
“No broker or dealer or any person associated with a broker or dealer, using the mails, or any means or instrumentality of interstate commerce, shall be deemed to have acted unlawfully or to have breached a duty under State or Federal law solely by reason of having received payment for order flow.”
Senator Toomey is seeking to preserve commission-free trading by stopping any action by the SEC, an exchange, or FINRA.
Senator Toomey stated in a public comment:
“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. Such technologies have been made possible in part by payment for order flow. My legislation will stop the SEC from restricting investor freedom under the guise of investor protection by ensuring every day Americans continue to have access to and choices in the stock market.”
The Senator explained that even with such payments, retail investors still obtain better prices on their trades even if it was channeled directly to an exchange. This is due to the fact that retail brokers must adhere to SEC and FINRA rules on the “best execution” of trades.
Recently, a participant in the payment for order flow market was interviewed by CNBC as the practice came under scrutiny. The CEO of Virtu, Doug Cifu, said retail investors were not being harmed by the practice. He explained that 95% of brokers in the US do not take payment for order flow but they still route through wholesalers. The brokers that do route using payment for order flow still route solely on execution quality and price improvement – just like the others. Cifu added that there was $11 billion in price improvement in 2020 in zero commission trading in this country.
The Investor Freedom Act of 2021 is available below.