Bulletins

House Dems consider ban on payment for order flow

A draft discussion bill mentions the controversial brokerage-industry practice.

​Gary Gensler at a 2013 hearing.

Gary Gensler at a 2013 hearing.

Photo: Andrew Harrer/Bloomberg via Getty Images

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.

Tomio Geron

Tomio Geron ( @tomiogeron) is a San Francisco-based reporter covering fintech. He was previously a reporter and editor at The Wall Street Journal, covering venture capital and startups. He was also as a staff writer at Forbes covering social media and venture capital, and edited the Midas List of top tech investors. He can be reached at tgeron@protocol.com or tgeron@protonmail.com.

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