Carl Levin, the former U.S. senator, held hearings into the practice in 2014 and asked the SEC to ban the payment arrangements.
He still believes the practice should be rooted out. The SEC “needs to stop brokers from accepting payments for routing their customers’ orders to certain traders and exchanges,” said Levin, a Michigan Democrat, in a Financial Times op-ed last month.
“It is like paying a hidden, private tax on savings whether someone invests through a large mutual fund or directly through a personal brokerage account,” Levin wrote.
Since the 2014 hearings, Finra has done targeted exams and found that some broker-dealers didn’t have or use a system allowing them to analyze their orders and ensure clients were getting the best execution and price.
Robinhood settled with the SEC in December after the agency charged the firm with making misleading statements about its order routing payments. The SEC alleged that some of the firm’s customers were not given the best price on their orders—a failure that allegedly cost investors $34 million more than they would have paid for the $5 per trade commissions other brokers charged from 2015 to 2018.
Robinhood settled without confirming or denying the SEC’s charges, saying the “settlement relates to historical practices that do not reflect Robinhood today,” and that it had reconfigured its routing practices to ensure best execution.
If regulators press ahead with new rules curtailing order-routing payments, many broker-dealers could wind up bringing their market-making activities in-house.
We “ultimately think many of these companies would look to bring market-making activities in-house, like Fidelity and some others,” said JMP Securities analyst Devin Ryan in an e-mail to investors this week. “It would take some time to set up, but we think there is too much at stake, and internalizing trading would be one allowable solution that could drive a rush to build or buy market-making functionality.”
For technical trader Barton, it was a tough lesson for newer investors, but not one that appears to break securities laws. “This is really about new traders learning how the system works. It happens every big bubble,” Barton said.