Deceiving the Young to Give to Themselves: Eliminating Payment for Order Flow to Ensure Loyal Agents

Abstract

When the popular retail brokerage firm Robinhood decided to restrict trades in certain securities in late January 2021, politicians, regulators, and the general public called for increased regulation on brokerage firms. The business model of online brokerage firms like Robinhood came under intense scrutiny. Specifically, regulators and politicians raised questions about Robinhood’s zero-commission fee model predicated on payment for order flow. In a report, the Securities and Exchange Commission (SEC) raised questions about payment for order flow––the kick-back received by brokerage firms for a customer’s order––and the conflicts of interest such payments pose for brokerage firms when carrying out their duty of best execution. As the SEC considers implementing new regulations on payment for order flow, including increased disclosure requirements and an outright ban, debate exists over the practicality of these regulatory changes. Brokerage firms like Robinhood argue that prohibiting payment for order flow altogether would stymie the democratization of American stock markets. In contrast, critics of the practice argue that the conflicts of interest that arise from payment for order flow necessitate enhanced regulation or an outright ban. This Note argues that banning payment for order flow is a necessary regulatory change for two principal reasons. First, a ban is necessary because it is impossible to eliminate the conflicts of interest that stem from the practice. Second, consent received by broker-dealers from retail investors to receive payment for order flow is inadequate under the common law of agency.