Mark Kolakowski published his article entitled, “SEC Considers Banning Payment for Order Flow” on October 22, 2021 on Investopedia.com. A payment for order flow (PFOF) is the payment that a broker receives from a market maker who processes the trades for the broker’s client. Robinhood Markets is one such broker that does not charge commissions for trades and earns its revenues through PFOFs. The trades do not occur on exchanges but through dark pools or other “not lit” wholesalers. For example, when a client makes a trade, Robinhood sends it to a market maker (such as Citadel Securities or Virtu Financial), which then matches buyers and sellers internally instead of sending them to exchanges. The market maker profits off the spread between the bid and ask, and then sends a part of that profit back to Robinhood.
This practice is banned in Canada Australia and the United Kingdom, and it may soon become banned in the United States. The current Securities and Exchange Commission Chairman, Gary Gensler is pushing for an overhaul of the US’s current trading regime so that the system is more fair for retail investors. He says that so much trading happens off exchanges that the “best price” on an exchange may be different from the best overall market price. Despite this, Mr. Gensler has not committed to saying that all trading should happen on exchanges.