SEC Chairman Says Banning Payment for Order Flow Is ‘On the Table’

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Updated Aug. 30, 2021 3:35 p.m. ET / Original Aug. 30, 2021 3:09 p.m. ET

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Gary Gensler, president of the U.S. Securities and Exchange Commission.

Melissa Lyttle/Bloomberg

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A arguable signifier that has brought successful billions of dollars to brokers and high-frequency trading firms is successful the crosshairs of the Securities and Exchange Commission, and could beryllium eliminated entirely.

In an interrogation with Barron’s connected Monday, SEC Chairman Gary Gensler said that a afloat prohibition of outgo for bid travel is “on the table.” Payment for bid flow is simply a signifier wherever brokers nonstop commercialized orders to marketplace makers that execute those trades successful instrumentality for a information of the profits. 

Gensler says the signifier has “an inherent struggle of interest.” Market makers marque a tiny dispersed connected each trade, but that’s not each they get, helium said.

“They get the data, they get the archetypal look, they get to lucifer disconnected buyers and sellers retired of that bid flow,” helium said. “That whitethorn not beryllium the astir businesslike markets for the 2020s.”

He didn’t accidental whether the bureau has recovered instances wherever the conflicts of interests resulted successful harm to investors. SEC unit is reviewing the signifier and could travel retired with proposals successful the coming months.

Gensler has mentioned respective times that the U.K., Australia, and Canada forbid outgo for bid flow. Asked if helium raises those examples due to the fact that a prohibition could besides hap successful the U.S., helium replied: “I’m raising this due to the fact that it’s connected the table. This is precise clear.”

It’s not the lone happening the SEC is considering.

“Also connected the array is however bash we determination much of this marketplace to transparency,” helium said. “Transparency benefits competition, and ratio of markets. Transparency benefits investors.”

Payment for bid is portion of a larger contented with marketplace operation that Gensler is trying to solve. He notes that astir fractional of trading is successful acheronian pools oregon is internalized by companies that support those trades disconnected exchanges. Even immoderate of the trading that takes spot connected exchanges is opaque — and exchanges are paid done rebates that are akin to outgo for bid flow. Opaque markets wherever antithetic investors person their commercialized orders processed otherwise person the imaginable for abuse.

“It provides an accidental for the marketplace shaper to marque more, and for yet the investing nationalist to get a small little erstwhile they sell, oregon person to wage much erstwhile they buy,” helium said. “I deliberation it besides affects companies raising money,” helium added, due to the fact that it could beryllium a obstruction to “fair, orderly and businesslike markets.”

The changes to outgo for bid travel whitethorn instrumentality spot arsenic portion of a larger reshuffling of however trades are processed and tracked.

There has been a roar successful retail trading successful the past 2 years, with millions of caller investors signing connected to brokerage apps to commercialized stocks, options, and cryptocurrencies for the archetypal time. The roar has been driven successful portion by a alteration successful the mode that brokers marque wealth connected lawsuit trading. Most brokers nary longer complaint for trades up front. They marque wealth disconnected trades by sending orders to marketplace makers similar high-frequency trading firms. The marketplace shaper executes the trade, and profits disconnected the quality betwixt the bid and asking prices, sending portion of that nett backmost to the broker. 

For astir brokers, the signifier is simply a comparatively tiny portion of their concern exemplary — often little than 10% of revenue. But for Robinhood Markets (ticker: HOOD), which pioneered zero-commission trading, outgo for bid travel makes up astir 80% of its revenue.

Shares of Robinhood were already trading little connected the day, but fell further aft the Barron’s report. In precocious day trading connected Monday, the banal was down 8%, astatine $43.03.

The institution has told investors successful securities filings that the SEC’s absorption connected outgo for bid travel is simply a hazard factor. But institution executives person played down the anticipation of it being banned. “Our presumption internally is that we don’t expect outgo for bid travel to beryllium banned,” said CFO Jason Warnick connected Robinhood’s latest net call. He added that “we bash deliberation due to the fact that outgo for bid travel is specified a tiny gross watercourse — it’s astir 2 to 2 and a fractional cents per $100 traded — that it’s not a terribly hard gross watercourse for america to replace.”


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But the SEC has recovered that each those fractions of pennies adhd up. In fact, the bureau settled allegations with Robinhood past year implicit however it negotiated outgo for bid flow, and its disclosures to customers. The bureau said that Robinhood made deals from 2015 to 2018 with marketplace makers that gave the institution a overmuch higher percent of the spread, whereas different brokers mostly gave much of the dispersed backmost to customers.

The SEC order said Robinhood had negotiated an 80/20 split, with the institution receiving the 80% and investors receiving 20%, whereas different brokers tended to person a divided person to 20/80. And the regulator said that Robinhood’s commercialized execution was truthful atrocious for consumers that it much than outweighed the payment they got from not having to wage a commission. To settee the allegations, Robinhood agreed to wage $65 cardinal but neither admitted nor denied the findings. The institution has besides said it has changed its outgo for bid travel practices.

Proponents of outgo for bid travel accidental that it is simply a mode for brokers to marque wealth that doesn’t truly wounded consumers, and let apps to complaint zero commissions. It is simply a large crushed that much radical than ever person started investing, Robinhood’s Warnick said.

“Never earlier has investing successful this state been cheaper,” helium said.

He besides noted that different brokers had historically accepted outgo for bid travel connected apical of commissions, whereas Robinhood has ne'er charged commissions.

Any alteration to the signifier would intelligibly beryllium contentious.

“We’ll beryllium decidedly defending our customers and making definite that we don’t enactment up barriers that person been taken down and kept radical out,” Warnick said.

Write to Avi Salzman astatine avi.salzman@barrons.com

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