On Monday, Dan Gallagher, the chief legal officer of Robinhood spoke to CNBC’s Squawk Box. He said that the Securities and Exchange Commission (SEC) would not ban payment for order flow. He defended the practice and said that it is ultimately a benefit for retail investors although brokerage firms receive back-end payments for directing the trades of clients to market makers.
Gallagher, who was the SEC commissioner from 2011 to 2015 thinks that the SEC will conclude that payment for order flow is an “amazingly good thing” for retail investors. So, they will not ban it.
Earlier last month, Barrons reported that Gary Gensler, who is the chair of the SEC, said that payment of order interest had “an inherent conflict of interest.” He had also mentioned that banning the practice was not off the table.
Gallagher admitted that banning payment for order flow was on the table and that the SEC would take a deep look at the issue and that it would be an “arduous” process. He also mentioned that the payment of order flow was the lifeblood of Robinhood. It helped the company offer zero commission and no brokerage, thereby bringing in a new generation of retail investors.
He said that this current market structure worked well for retail investors, who were not stupid. He felt that it was insulting to think that they needed protection from the government and the nanny state to save them from making bad decisions.
The entire issue of pay for order flow, which is generally considered to be a controversial practice, came into focus during the January 2021 short squeeze of GameStop stock. Robinhood was forced to limit trading on certain securities, its CEO appeared before the House Committee in February and lawmakers criticized the payment for order flow process for its conflict of interest.
However, the chief law officer told the CNBC news and talk program hosts on Squawk Box that if he was still working for the SEC, he would look into the people and institutions whom he claims lied about the GameStop short squeeze instead of payments for order flow.
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