The SEC may back off from a total ban on payment for order flow

The SEC reportedly will not push for a total ban on payment for order flow, a proposal that chair Gary Gensler said was "on the table" just a year ago.

The regulator is expected to announce changes to the way payment for order flow is conducted, but it will not involve a total prohibition of the controversial system used in processing stock trades, Bloomberg said in a report on Thursday.

The SEC plan is good news for retail stockbrokers like Robinhood, whose revenue model relies heavily on the rebates it receives for sending trade orders to market makers, known as payment for order flow.

Critics have argued that payment for order flow gives brokers an incentive to encourage retail investors to make as many trades as possible, exposing them to financial risks. Robinhood and payment for order flow came under heavy scrutiny early last year during the GameStop trading frenzy.

In August 2021, Gensler told Barron's that the regulator was considering a total ban on the system. Wall Street analysts cited the potential ban as a major headwind for Robinhood, which has already taken hits from the broad market downturn. Canada and the U.K. have banned payment for order flow, and Australia has instituted temporary prohibitions on the practice as it considers a ban.

The company has been forced to make dramatic cuts this year. Just a few months after announcing that it was slashing 9% of its workforce, Robinhood said it was cutting another 23% because the first round of reductions “did not go far enough,” CEO Vlad Tenev said in a letter to employees.

Tenev also pointed to “additional deterioration of the macro environment, with inflation at 40-year highs accompanied by a broad crypto market crash.” The company also acknowledged that it essentially overshot staffing needs for 2022 based on the “assumption that the heightened retail engagement we had been seeing with the stock and crypto markets in the COVID era would persist into 2022.”

Robinhood rallied briefly on Thursday trades on news that payment for order flow would not be banned. But the stock was off more than 2% midday. TD Ameritrade, a subsidiary of Charles Schwab, also makes heavy use of payment for order flow; Schwab shares also leapt early in the day and then fell.

The SEC could not immediately be reached for comment.