Politics

Republicans Are Backing A Bill To Democratize Investing, But The SEC Has Other Plans

(Photo by Bill Clark-Pool/Getty Images)

Daily Caller News Foundation logo
Ailan Evans Deputy Editor
Font Size:
  • Republican lawmakers are sponsoring a bill designed to protect financial transactions known as “payment for order flow,” in which brokerages route their clients’ trades to market makers.
  • Pennsylvania Republican Sen. Pat Toomey, ranking member of the Senate Banking Committee, introduced the Investor Freedom Act of 2021 in late October to protect “zero commission trading and user-friendly mobile apps” from Securities and Exchange Commission (SEC) rules that would prohibit payment for order flow, arguing the bill would help lower the barrier to entry for retail investors.
  • Critics say payment for order flow creates a fundamental conflict of interest as brokers may not be incentivized to route trades to the best market maker for the trader but instead to the highest bidder, and SEC Chairman Gary Gensler has even floated the idea of prohibiting the practice entirely.
  • “Opposition to this bill seeks to reward companies who restrict access to the market for everyday Americans and stifle competition by throwing up barriers to entry for innovators,” Sen. 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 brokerages route their clients’ trades to market makers.

The practice is at the heart of the burgeoning online trading industry that has helped open up the stock market to retail investors by lowering trading fees. However, regulators have targeted payment for order flow as ripe for abuse, arguing that brokerages may be incentivized to act against their clients’ interests.

Pennsylvania Republican Sen. Pat Toomey, ranking member of the Senate Banking Committee, introduced the Investor Freedom Act of 2021 in late October to protect “zero commission trading and user-friendly mobile apps” from Securities and Exchange Commission (SEC) rules that would prohibit payment for order flow. The legislation is co-sponsored by Republican Sens. Tim Scott of South Carolina and Kevin Cramer of North Dakota, who each signed onto the bill earlier in December.

Payment for order flow allows brokerages to charge lower trading fees, or often no fees at all, as instead they earn revenue by selling their clients’ trade orders to market makers such as hedge funds, who then execute the trade themselves. (RELATED: Republican Lawmakers Say China’s Cryptocurrency Crackdown Is An Opportunity For America)

Sarah Silbiger/Pool/Getty Images

Sen. Pat Toomey questions former Treasury Secretary Steven Mnuchin during a hearing on Dec. 10. (Sarah Silbiger/Pool/Getty Images)

The practice is employed by many of the most popular online brokerages and trading apps, including Robinhood, Charles Schwab, TD Ameritrade, E*TRADE and many others. Proponents of the practice argue that because it allows brokerages to operate without charging traders a commission, it lowers the barrier of entry for smaller retail investors, thereby democratizing the market.

Critics say the practice creates a fundamental conflict of interest as brokers may not be incentivized to route trades to the best market maker for the trader, but instead to the highest bidder. SEC Chairman Gary Gensler has even floated the idea of prohibiting the practice entirely.

“They [market makers] get the data, they get the first look, they get to match off buyers and sellers out of that order flow,” Gensler told Barron’s in August. “That may not be the most efficient markets for the 2020s.”

Toomey, who is spearheading the Investor Freedom Act, has dismissed regulators’ arguments that payment for order flow creates a conflict of interest, pointing out that the practice has benefited consumers by opening up the stock market to smaller investors. (RELATED: Biden’s FCC Nominee Gigi Sohn Wants To ‘Silence Dissent,’ Top Senate Republicans Say)

“Tens of millions of Americans are investors who never were before, and they are therefore participating in the returns of the greatest capital market on the planet,” Toomey told Yahoo Finance in November, arguing that payment for order flow was “not the whole reason, but it’s a contributing factor.”

Charles Schwab, which operates an online trading platform and brokerage, donated $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 donated $8,100 to Cramer in 2018 during his senatorial campaign.

Morgan Stanley, the owner of E*TRADE, donated $27,200 to Toomey and $10,000 to Scott in 2016, and $2,700 to Cramer in 2018. Ally Financial donated $2,500 to Scott and $2,000 to Toomey, TD Ameritrade donated $2,700 to Cramer and The Vanguard Group contributed $7,000 to Scott and $1,400 to Toomey.

NEW YORK, NY - MAY 10: Co-founder and co-CEO of Robinhood Vladimir Tenev speaks onstage during TechCrunch Disrupt NY 2016 at Brooklyn Cruise Terminal on May 10, 2016 in New York City. (Photo by Noam Galai/Getty Images for TechCrunch)

Co-founder and co-CEO of Robinhood Vladimir Tenev speaks onstage during TechCrunch Disrupt NY 2016 at Brooklyn Cruise Terminal on May 10, 2016 in New York City. (Photo by Noam Galai/Getty Images for TechCrunch)

“At the end of the day, we want the stock market to be as accessible to the American people as possible. The Investor Freedom Act recognizes the new innovations and technologies that have made this a reality,” Cramer told the Daily Caller News Foundation. “Opposition to this bill seeks to reward companies who restrict access to the market for everyday Americans and stifle competition by throwing up barriers to entry for innovators.”

Cramer added that he receives “contributions from farmers and truck drivers too that appreciate good policy.”

When reached for comment, Amanda Thompson, spokeswoman for Toomey, characterized efforts to ban payment for order flow as motivated by left-wing 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 the DCNF.

She also pointed out that Toomey is not running for re-election and did not consult with brokerages before introducing the bill in response to questions about campaign contributions.

“When the Extreme Left and their allies in the press can’t win an argument on the merits, they malign Republicans’ motives. Those making this libelous smear clearly haven’t bothered to look at Senator Toomey’s career, which he has spent advocating for free markets and economic freedom,” she said.

Scott’s office did not respond to the DCNF’s request for comment.

Payment for order flow drew attention in early 2021 amid the GameStop short squeeze after retail investors were temporarily prevented from trading on certain brokerage apps. The events resulted in a House Financial Services hearing in which lawmakers questioned the practice, among other topics.

The SEC also released its report on the GameStop situation in late November echoing prominent criticisms of payment for order flow.

“These payments can create a conflict of interest for the retail broker-dealer,” the SEC wrote.

All content created by the Daily Caller News Foundation, an independent and nonpartisan newswire service, is available without charge to any legitimate news publisher that can provide a large audience. All republished articles must include our logo, our reporter’s byline and their DCNF affiliation. For any questions about our guidelines or partnering with us, please contact licensing@dailycallernewsfoundation.org.

PREMIUM ARTICLE: Subscribe To Keep Reading

Sign up

By subscribing you agree to our Terms of Use

You're signed up!

Sign up

By subscribing you agree to our Terms of Use

You're signed up!
Sign up

By subscribing you agree to our Terms of Use

You're signed up!

Sign up

By subscribing you agree to our Terms of Use

You're signed up!
Sign up

By subscribing you agree to our Terms of Use

You're signed up!

Sign Up

By subscribing you agree to our Terms of Use

You're signed up!
Sign up

By subscribing you agree to our Terms of Use

You're signed up!
Sign up

By subscribing you agree to our Terms of Use

You're signed up!
BENEFITS READERS PASS PATRIOTS FOUNDERS
Daily and Breaking Newsletters
Daily Caller Shows
Ad Free Experience
Exclusive Articles
Custom Newsletters
Editor Daily Rundown
Behind The Scenes Coverage
Award Winning Documentaries
Patriot War Room
Patriot Live Chat
Exclusive Events
Gold Membership Card
Tucker Mug

What does Founders Club include?

Tucker Mug and Membership Card
Founders

Readers,

Instead of sucking up to the political and corporate powers that dominate America, The Daily Caller is fighting for you — our readers. We humbly ask you to consider joining us in this fight.

Now that millions of readers are rejecting the increasingly biased and even corrupt corporate media and joining us daily, there are powerful forces lined up to stop us: the old guard of the news media hopes to marginalize us; the big corporate ad agencies want to deprive us of revenue and put us out of business; senators threaten to have our reporters arrested for asking simple questions; the big tech platforms want to limit our ability to communicate with you; and the political party establishments feel threatened by our independence.

We don't complain -- we can't stand complainers -- but we do call it how we see it. We have a fight on our hands, and it's intense. We need your help to smash through the big tech, big media and big government blockade.

We're the insurgent outsiders for a reason: our deep-dive investigations hold the powerful to account. Our original videos undermine their narratives on a daily basis. Even our insistence on having fun infuriates them -- because we won’t bend the knee to political correctness.

One reason we stand apart is because we are not afraid to say we love America. We love her with every fiber of our being, and we think she's worth saving from today’s craziness.

Help us save her.

A second reason we stand out is the sheer number of honest responsible reporters we have helped train. We have trained so many solid reporters that they now hold prominent positions at publications across the political spectrum. Hear a rare reasonable voice at a place like CNN? There’s a good chance they were trained at Daily Caller. Same goes for the numerous Daily Caller alumni dominating the news coverage at outlets such as Fox News, Newsmax, Daily Wire and many others.

Simply put, America needs solid reporters fighting to tell the truth or we will never have honest elections or a fair system. We are working tirelessly to make that happen and we are making a difference.

Since 2010, The Daily Caller has grown immensely. We're in the halls of Congress. We're in the Oval Office. And we're in up to 20 million homes every single month. That's 20 million Americans like you who are impossible to ignore.

We can overcome the forces lined up against all of us. This is an important mission but we can’t do it unless you — the everyday Americans forgotten by the establishment — have our back.

Please consider becoming a Daily Caller Patriot today, and help us keep doing work that holds politicians, corporations and other leaders accountable. Help us thumb our noses at political correctness. Help us train a new generation of news reporters who will actually tell the truth. And help us remind Americans everywhere that there are millions of us who remain clear-eyed about our country's greatness.

In return for membership, Daily Caller Patriots will be able to read The Daily Caller without any of the ads that we have long used to support our mission. We know the ads drive you crazy. They drive us crazy too. But we need revenue to keep the fight going. If you join us, we will cut out the ads for you and put every Lincoln-headed cent we earn into amplifying our voice, training even more solid reporters, and giving you the ad-free experience and lightning fast website you deserve.

Patriots will also be eligible for Patriots Only content, newsletters, chats and live events with our reporters and editors. It's simple: welcome us into your lives, and we'll welcome you into ours.

We can save America together.

Become a Daily Caller Patriot today.

Signature

Neil Patel