GOP Senator Toomey introduces bill to protect payment for order flow practice crucial to brokers like Robinhood as SEC eyes ban

Pat Toomey
GOP Sen. Pat Toomey of Pennsylvania.

  • Senator Pat Toomey introduced a bill to limit the SEC’s ability to ban payment for order flow on Thursday.
  • PFOF has been crucial to brokerage firms like Robinhood, as it enables commission-free trading.
  • SEC Chairman Gary Gensler said in August that a ban of the practice is “on the table.”

Republican Senator Pat Toomey introduced a bill on Thursday that would limit the Security and Exchange Committee’s ability to ban payment for order flow.

PFOF has been a crucial revenue component of brokerage firms like Robinhood that offer no-fee trading and fractional share investing. According to Toomey, those investment breakthroughs were enabled by PFOF and have helped knock down barriers to entry in the stock market for retail investors.

Toomey noted in a CNBC interview on Thursday that he recalls paying a $100 commission when he first started buying stocks.

But SEC chairman Gary Gensler said in August that a ban of PFOF is “on the table” due to concerns about whether investors are getting best execution prices for their trades as Robinhood and other brokers route orders to market markers based on payments.

“[PFOF is] an inherent conflict of interest. They get the data, they get the first look, they get to match buyers and sellers out of that order flow. That may not be the most efficient markets for the 2020s,” Gensler told Barron’s.

According to Barron’s, Gensler didn’t say whether the SEC found any instances of where the conflicts of interests resulted in harm to investors. Toomey echoed those comments on Thursday, saying he has yet to hear back from the SEC as to how PFOF is harming retail investors.

There is no indication that Toomey’s proposed legislation will make it through a Democratic controlled House, Senate, and White House, but it would be a big relief to Robinhood if it did. While the company said it is diversifying its revenue base away from PFOF, the popular trading app still derived 14% of its third quarter revenue from equity-based payment for order flow.

But some retail investors involved in the GameStop and AMC trading frenzy earlier this year actually do want the PFOF practice banned, as they believe Robinhood’s PFOF relationship with Citadel Securities had an influence on Robinhood’s temporary ban on its users ability to buy shares of the highly volatile stocks.