The Securities and Exchange Commission will investigate, but not ban, a practice known as payment for order flow, the legal chief for the Robinhood trading app said Monday (Sept. 13).
“The idea of banning payment for order flow is pretty draconian,” Robinhood Chief Legal Officer Dan Gallagher, who is a former SEC commissioner, told Barron’s on Sept. 2. “This is the revenue that provided us the ability to offer commission-free trading with no minimum balance.”
Read more: Robinhood Blasts ‘Draconian’ SEC Ban
Earlier this month, Robinhood Markets said it was considering litigation against the Securities and Exchange Commission after the agency said it could ban payment for order flow, one of its key sources of revenue.
But will that ban even happen? Gallagher doesn’t seem to think so if his interview with CNBC Monday (Sept. 13) is any indication.
Speaking on the network’s Squawkbox, Gallagher defended the practice, saying it is — in the end — beneficial for retail investors.
The SEC is “going to arrive at the conclusion that payment for order flow is undoubtedly an amazingly good thing for retail investors and they’re not going to ban it,” Gallagher said.
Payment for order flow is a controversial practice that compensates stockbrokers for routing trades to a particular market maker. Considered a kickback, the practice is already banned in the U.K., Canada and Australia.
As CNBC notes, it’s also one of Robinhood’s largest revenue sources. But SEC chair Gary Gensler has said the practice has“an inherent conflict of interest” and that an outright ban of payment for order flow is possible.
Galagher, who was SEC commissioner from 2011 to 2015, said he expects the agency to take a deep look at the issue.
“At Robinhood, [payment for order flow] is the life blood of a no commission, no minimum balance brokerage. This is what has brought in a whole new generation of investors,” said Gallagher. “I think that the overwhelming evidence is that the current market structure works well for retail investors.”
He also told CNBC that if he still ran the SEC, the agency would be investigating the individuals and entities he said lied, leading to the short squeeze on GameStop stock earlier this year, which led Robinhood to limit trading on some securities.