- Republican lawmakers are sponsoring a bill designed to protect financial transactions known as “payment for order flow,” in which brokerage firms route transactions from their clients to market makers.
- Pennsylvania Republican Senator Pat Toomey, a leading member of the Senate Banking Committee, introduced the 2021 Investor Freedom Act in late October to protect “commission-free commerce and user-friendly mobile apps” from Securities and Markets rules. Exchange Commission (SEC) that would ban payment for order flow, arguing that the bill would help reduce the barrier to entry for retail investors.
- Critics say order flow payment creates a fundamental conflict of interest as brokers may not have an incentive to route trades to the best market maker for the trader but rather to the highest bidder, and the chairman of the market. the SEC, Gary Gensler, even floated the idea of ââbanning the practice. entirely.
- “Opposition to this bill seeks to reward companies that restrict market access for ordinary Americans and stifle competition by erecting barriers to entry for innovators,” Senator Kevin Cramer told the Daily Caller News Foundation.
Republican lawmakers are sponsoring a bill designed to protect financial transactions known as “payment for order flow,” in which brokerage firms route transactions from their clients to market makers.
The practice is at the heart of the booming online trading industry which has helped open up the stock market to retail investors by lowering trading fees. However, regulators have targeted order flow payment as conducive to abuse, arguing that brokerage firms can be tricked into acting against the interests of their clients.
Republican Senator from Pennsylvania Pat Toomey, a senior member of the Senate Banking Committee, introduced the Investor Freedom Act of 2021 in late October to protect âcommission-free transactions and user-friendly mobile appsâ from Securities and Exchange Commission (SEC) rules that would prohibit payment from order flow. The legislation is co-sponsored by Republican Senses Tim Scott of South Carolina and Kevin Cramer of North Dakota, who each signed the bill earlier in December.
Paying for order flow allows brokerage firms to charge lower trading fees, if any fees at all, because instead they earn income by selling their clients’ trading orders to market makers. such as hedge funds, which then execute the transaction themselves.
The practice is used by many of the most popular online brokerage houses and trading apps, including Robinhood, Charles Schwab, TD Ameritrade, E * TRADE and many more. Supporters of the practice Argue that because it allows brokerage houses to operate without charging traders a commission, it lowers the barrier of entry for small retail investors, thereby democratizing the market.
Reviews to say the practice creates a fundamental conflict of interest as brokers may not have an incentive to route trades to the best market maker for the trader, but rather to the highest bidder. SEC Chairman Gary Gensler even floated the idea of ââtotally banning the practice.
“They [market makers] get the data, they get the first look, they can match the buyers and sellers of that order flow, âGensler Recount Barron in August. “These may not be the most efficient markets for the 2020s.”
Toomey, who heads the Investor Freedom Act, dismissed regulators’ arguments that payment for order flows creates a conflict of interest, noting that the practice has benefited consumers by opening up the stock market to small investors.
“Tens of millions of Americans are investors who have never been before, and therefore participate in the returns of the largest capital market on the planet,” Toomey Recount Yahoo Finance in November, saying payment for the flow of orders was “not the only reason, but it is a contributing factor.”
Charles Schwab, who operates an online trading and brokerage platform, donate $ 16,800 to Toomey and $ 9,400 to Scott during the 2016 election cycle in which both senators were running, according to campaign finance data from OpenSecrets. The firm also donate $ 8,100 to Cramer in 2018 during his senatorial campaign.
Morgan Stanley, the owner of E * TRADE, donate $ 27,200 to Toomey and $ 10,000 to Scott in 2016, and $ 2,700 to Cramer in 2018. Ally Financial donate $ 2,500 to Scott and $ 2,000 to Toomey, TD Ameritrade donate $ 2,700 to Cramer and The Vanguard Group contributed $ 7,000 to Scott and $ 1,400 to Toomey.
âUltimately, we want the stock market to be as accessible as possible to the American people. The Investor Freedom Act recognizes the new innovations and technologies that have made it a reality, âCramer told the Daily Caller News Foundation. “Opposition to this bill seeks to reward companies that restrict market access for ordinary Americans and stifle competition by erecting barriers to entry for innovators.”
Cramer added that he receives “contributions from farmers and truck drivers who also appreciate good politics.”
When contacted for comment, Amanda Thompson, spokesperson for Toomey, called the efforts to ban payment for order flows as motivated by leftist ideology.
“Socialists are attacking Republicans for introducing legislation to protect commission-free trading because they want to make it harder and more expensive for average Americans to invest in the stock market,” Thompson told DCNF.
She also pointed out that Toomey is not running for re-election and did not consult with brokerage firms before introducing the bill in response to questions about campaign contributions.
âWhen the far left and their allies in the press can’t win a substantive argument, they slander the motives of Republicans. Those who make this slanderous slander clearly did not bother to look at the career of Senator Toomey, which he spent defending free markets and economic freedom, âshe said.
Scott’s office did not respond to DCNF’s request for comment.
Order Flow Payment Drew Attention in Early 2021 in the Middle of GameStop short press after retail investors were temporarily barred from trading on certain brokerage applications. The events successful during a House Financial Services hearing in which lawmakers questioned the practice, among other topics.
The SEC also released its report on GameStop’s situation at the end of November, echoing the major criticisms regarding the payment of the order flow.
âThese payments can create a conflict of interest for the retail broker,â the SEC wrote.
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