markets

Robinhood's Chief Legal Officer Says the SEC Won't Ban Payment for Order Flow

Cindy Ord | Getty Images
  • 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," said Robinhood chief legal officer, Dan Gallagher, who was the agency's commissioner from 2011 to 2015
  • Payment for order flow is the back-end payment that brokerages receive for directing clients' trades to market makers.
  • Gallagher told CNBC that if he still worked for the SEC, he would be investigating the people and institutions that he claims lied surrounding the GameStop short squeeze.

Robinhood's chief legal officer defended on Monday the back-end payment that brokerages receive for directing clients' trades to market makers, saying it is ultimately a benefit to retail investors.

The Securities and Exchange Commission 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," Robinhood's Dan Gallagher told CNBC's "Squawk Box."

Payment for order flow is one of Robinhood's largest revenue sources and is how the millennial-favored stock trading app is able to provide zero-commission trading. Payment for order flow is a controversial practice that has garnered attention from regulators and Main Street.

Banning payment for order flow "is on the table," said Gallagher, who was SEC commissioner from 2011 to 2015. "I think they're going to take a deep look at this issue. I think, by law, they have to go through a very arduous process."

SEC chair Gary Gensler told Barron's last month that payment for order flow has "an inherent conflict of interest." Gensler said banning the practice is not off the table.

"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."

Following an epic short squeeze in GameStop's stock in January that forced Robinhood to limit trading on certain securities, Robinhood CEO Vlad Tenev was forced to testify to the House Financial Services Committee in February. Legislators criticized payment for order flow for the conflict it has with market makers like Citadel Securities.

"The notion that are customers are stupid, that they need protection, that they need the government and the nanny state to come out and save them for making bad decisions, I think they're insulted," said Gallagher.

Gallagher told CNBC that if he still worked for the SEC, he would be investigating the people and institutions that he claims lied surrounding the GameStop short squeeze.

Copyright CNBCs - CNBC
Contact Us