Pat Toomey (R-PA) speaks throughout a information convention to introduce the Republican infrastructure plan, on the U.S. Capitol in Washington, April 22, 2021.
Erin Scott | Reuters
Sen. Pat Toomey will on Thursday introduce laws to guard a controversial apply often known as fee for order circulate, the primary income for on-line brokerages like Robinhood Markets.
Securities and Alternate Fee Chairman Gary Gensler, Wall Avenue’s high regulator and a critic of the apply, has made reforming fee for order circulate a high precedence after the buying and selling frenzy in shares corresponding to GameStop earlier this 12 months.
Particularly, Toomey’s invoice would forestall the SEC from instituting an outright ban on fee for order circulate, an concept Gensler has mentioned he is contemplating as a part of his broader efforts to reform the apply within the U.S.
The Pennsylvania Republican defended the apply for serving to develop new funding apps, low-cost buying and selling and extra environment friendly execution.
“New improvements—corresponding to zero fee buying and selling and user-friendly cellular apps—have allowed extra People to take part within the inventory market than ever earlier than,” Toomey, the rating member on the Senate Banking Committee, mentioned in a press launch. “Such applied sciences have been made potential partially by fee for order circulate.”
Advocates like Toomey say that fee for order circulate permits Robinhood and different on-line brokerages to supply trades with no upfront fee charges. These zero-commission inventory trades helped Robinhood persuade tens of millions of youthful clients to speculate for the primary time, and are credited for broader market participation throughout the U.S.
Lots of its opponents additionally generate revenues from fee for order circulate, although the apply has outsized implications for Robinhood. In a authorities submitting printed in July, Robinhood mentioned 81% of its first-quarter revenues got here from fee for order circulate.
The SEC has reviewed fee for order circulate a number of occasions earlier than and has to this point agreed with brokers and merchants that it advantages small buyers, a principal concern for SEC chief Gensler.
He and different critics argue that fee for order circulate poses a battle of curiosity for brokerages because the brokers can both earn extra by promoting their purchasers’ order quantity or go that money on to clients within the type of cheaper trades.
These cautious of fee for order circulate, or PFOF, additionally word that there are solely a pair massive, high-speed buying and selling companies to execute trades for purchasers of retail brokerage companies like Robinhood.
One such high-speed buying and selling agency, also referred to as a market maker, is Citadel Securities. That one firm handles 27% of U.S. equities buying and selling quantity and 37% of all U.S.-listed retail quantity.
Robinhood’s chief authorized officer mentioned final month that he believes the SEC will “arrive on the conclusion that fee for order circulate is undoubtedly an amazingly good factor for retail buyers and so they’re not going to ban it.”
Gensler acknowledges that high-speed buying and selling and easy-to-use apps have made investing each cheaper and extra in style. However the dominance of some large market makers, he warns, might restrict competitors and end in dearer trades for the typical investor.
“Retail buyers can commerce over commission-free brokerage apps. Telecommunication has reworked the velocity of high-frequency buying and selling,” Gensler mentioned in ready testimony in September. “That wasn’t the case even just a few years in the past.”
Nonetheless, “practically half of the amount transacted is executed in ‘darkish swimming pools’ or by wholesalers,” he added. “I consider it is applicable to take a look at methods to clean up the SEC’s guidelines to make sure that our fairness markets mirror our mission and are as environment friendly and aggressive as they could possibly be.”
Exterior the SEC’s evaluation, the percentages Toomey’s invoice turns into regulation anytime quickly seem slim in a Congress managed by Democrats. Gensler, nominated to guide the SEC by President Joe Biden, has been inspired by progressive lawmakers to step up regulatory oversight.
Additional, with Democrats intent on enacting trillions in spending, going through a looming debt ceiling and poised to evaluate a slate of recent Federal Reserve nominees, it is unclear whether or not the Senate might contemplate the laws earlier than 12 months’s finish.