House Democrats are considering a bill to ban payment for order flow, the industry practice that brokers have used to offer free trades to retail investors.
The draft discussion bill is slated to be part of the agenda for tomorow's House Financial Services committee, which is holding its third in a series of hearings on the GameStop saga. New SEC chair Gary Gensler will speak at the hearing.
Payment for order flow has been a key to Robinhood's success as a retail trading brokerage, but other brokerages such as Schwab have also used it. A ban on the practice would affect brokerage firms, market makers, and retail investors alike.
Critics have raised questions about the conflict of interest posed by payment for order flow, with some suggesting brokers seek the highest payment rather than the best share prices. The House majority staff's memo on the issue states: "The retail broker-dealer may not, for instance, route an order based solely on which market maker will offer the most incentives to the broker for order flow. Nonetheless, there is a conflict between a retail broker-dealer's receipt of PFOF, and its best execution obligations."
Additional draft proposals include banning "trading ahead by market makers" and a study of gamification in trading and increased transparency in capital markets.