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Aaron Brown

What Gary Gensler Really Meant With His Order Flow Remarks

The SEC chair is taking aim at market makers like Citadel and Virtu, not Robinhood and other brokers. 

Did Robinhood just dodge the SEC?

Did Robinhood just dodge the SEC?

Photographer: Gabby Jones/Bloomberg via Getty Images

Market participants may have misinterpreted comments by U.S. Securities and Exchange Commission Chair Gary Gensler about payment for order flow. Gensler told Barron’s that a ban on that practice is “on the table” because it generates “an inherent conflict of interest.” Shares of Robinhood Markets Inc., Charles Schwab Corp. and other brokerages most dependent on payment for order flow promptly dropped. But Gensler’s next sentences changed his meaning significantly, and Robinhood may not be the firm most at risk.

In payment for order flow, a retail broker sends customer orders to a market maker such as Citadel Securities or Virtu Financial Inc. These firms match buy and sell orders at prices within the quoted market spreads. So if a stock is bid at $49.95 and offered at $50.05, the market maker might fill a sell order at $49.97, a buy order at $50.03 and make a profit of six cents. (These are hypothetical numbers.) Both the retail buyer and retail seller get better prices than market orders sent to an exchange. The market maker then sends payment, say two cents per share, to the retail broker. This allows retail brokers to charge zero commissions.