GOP senator's bill looks to block SEC from banning payment for order flow

SEC Chairman Gary Gensler has expressed concern that payment for order flow may create conflicts of interest for online trading apps and has hinted the agency may consider ending it. A leading Capitol Hill Republican on regulatory oversight wants to stop him in his tracks.

Sen. Patrick Toomey of Pennsylvania, the ranking Republican on the Senate Banking Committee, this week introduced the Investor Freedom Act of 2021, which would prohibit the Securities and Exchange Commission from barring payment for order flow.

Under the practice, retail brokers route trades through certain market makers in order to get a fee for them. Proponents like Toomey say it enables commission-free trading. Critics contend it prevents investors from getting best execution for their trades.

The trading frenzy earlier this year involving GameStop Corp. and other meme stocks elevated payment for order flow as a regulatory issue.

“[P]ayment for order flow and the incentives it creates may cause broker-dealers to find novel ways to increase customer trading, including through the use of digital engagement practices,” SEC staff said in an Oct. 14 report about the GameStop phenomenon.

In a recent CNBC interview, Gensler questioned whether zero-commission trading undermined best execution and said the agency would assess whether to reform or ban the practice.

“I believe payment for order flow and exchange rebates may present a number of conflicts of interest,” Gensler said in prepared testimony for an Oct. 5 hearing of the House Financial Services Committee.

Toomey views payment for order flow as a key factor in helping ordinary investors access the financial market through trading apps like Robinhood.

“New innovations -- such as zero commission trading and user-friendly mobile apps -- have allowed more Americans to participate in the stock market than ever before,” Toomey said in a statement introducing his bill. “Such technologies have been made possible in part by payment for order flow. My legislation will stop the SEC from restricting investor freedom under the guise of investor protection by ensuring every day Americans continue to have access to and choices in the stock market.”

Toomey’s legislation would prohibit the SEC, the Financial Industry Regulatory Authority Inc. and stock exchanges from promulgating rules to end payment for order flow. Under the bill, receiving payments would not be deemed a violation of best execution rules.

As happens on most issues, there’s a partisan split on payment for order flow. Generally, congressional Republicans support it while Democratic lawmakers raise concerns. Democrats hold the majority on the Senate Banking Committee and aren’t likely to bring Toomey’s bill up for a hearing or a vote.

Unless Republicans gain control of the Senate -- and the House -- Toomey’s legislation is likely to remain an attempt to send the SEC a message rather than actually stop the agency from acting.