Retail brokerage Robinhood Markets (HOOD) reportedly plans to challenge the potential ban on payment-for-order-flow signaled by the Securities and Exchange Commission, earlier this week, according to a media report.
Robinhood told Barron's on Friday it would "seriously consider" taking the SEC to court to block the ban on payment-for-order-flow.
"The idea of banning payment for order flow is pretty draconian,” Robinhood’s legal chief Dan Gallagher told Barron's.
Payment for order flow occurs when a retail broker such as Robinhood sends its client orders to a single market-maker -- instead of an exchange -- and gets a rebate from the wholesale broker in return. Those payments, Robinhood says, allow it to offer commission-free trading to its 18 million customers.
This is a practice that accounts for most of the online brokerage’s revenues.
On Monday, SEC Chairman Gary Gensler, in an interview with Barron's, said a full prohibition of payment for order flow was “on the table” as part of a broader agency review.
To be sure, payment-for-order-flow is legal and has been common in the U.S. brokerage industry for decades. But it drew renewed attention this year after the trading frenzy in GameStop (GME) and other meme stocks spurred scrutiny of the handling of small investors’ trades.
Lawmakers have criticized Robinhood for willfully placing trading limits on the heavily shorted GameStop stock at the height of the retail trading frenzy leading to more wild trading swings and accusations the platform was trying to help hedge funds who were short the stock.
Shares of Robinhood traded 2.02% lower at $43.59 at last check.