Capitol Report Published: March 9, 2021 at 10:58 a.m. ET Payment for order flow remains under scrutin
Payment for order flow remains under scrutiny
The Senate Banking Committee began its public probe of the GameStop saga on Tuesday, with Democrats and Republicans staking out opposing positions on the value and dangers of a new retail trading landscape characterized by firms like Robinhood that offer no-commission trades and easy-to-use smartphone applications.
Banking Committee Chairman Sherrod Brown, an Ohio Democrat, said that the frenzied rise in the price of GameStop Inc.
shares in January, and their continued volatility since that time, illustrates that “the stock market is detached from the economy and the reality of most Americans’ lives.”
He took aim at Robinhood’s business model in particular, alleging that “firms like Robinhood were founded on a model that exploits small investors by encouraging fast and loose trading, and then sells their trades to big market players.”
Zero-commission online broker Robinhood has remained at the center of the discussion over the state of retail investing since it became one of the favorite brokers used by a group of social media users who promoted GameStop shares, with many seeing outsized gains on risky options bets that paid off when other investors, who were betting against the company, were forced to close out their short positions.
GameStop shares have whipsawed from roughly $17 per share to start the year to an intraday high of $483 in late January, to below $40 just a few weeks later. They are up roughly 124% in March at more than $240, according to FactSet.
Robinhood and other zero-commission brokers earn a large share of their revenues from payment for order flow, a practice whereby whereby market makers pay brokers for the privilege of executing investor trades. Critics say this creates a conflict of interest between brokers and market makers, while proponents of the practice say it has lowered costs for retail traders and that current securities regulations already prevent the arrangement from being abused.
Robinhood says that it has “democratized finance” by enabling anyone with a smartphone and a few extra dollars to begin building wealth in the stock market.
Republicans on the committee were eager to defend Robinhood and innovations in financial technology that have led to free trading stock trades being the industry standard.
“New developments have made it a great time to be a retail investor,’ said Sen. Pat Toomey of Pennsylvania, the ranking Republican on the committee. “Today, a person of modest means can invest in the stock market at zero or minimal cost.”