Washington shouldn’t add more barriers to investment – InsideSources

It has never been easier for all Americans, regardless of financial means, to participate in the stock market. Largely due to the prevalence of “commission-free trading” apps, retail investors accounted for nearly a fifth of US stock trading volume in 2020, double the amount of the previous decade. We should all rejoice that more young people and people of modest means have access to commercial markets that could help them increase their long-term wealth. Unfortunately, overzealous lawmakers and regulators in Washington, DC have put commission-free trading in their sights. If they succeed, it could spell the end of the creative tools that have democratized investing for ordinary people – an outcome that would benefit the few rather than the many.

The march towards commission-free trading began in earnest in 1975 when regulators abolished fixed trading commissions, but the practice remained limited until the last decade. It wasn’t until Robinhood began offering commission-free transactions in 2013 that the industry began to change its business model. In order to stay competitive in the market, the biggest players in the trading world, like Charles Schwab, TD Ameritrade and E*Trade all started offering commission-free trading services in 2019. Thanks to free competition and the innovation, the new price for trading seemingly overnight became $0.

But how can companies offer zero-cost trading services? In order to remain a financially viable business while offering clients $0 trades, trading platforms use a process known as “Payment for Order Flow” (PFOF). Under this model, trading platforms such as Robinhood route client orders to market makers who execute the trade and, in return, remit payment to the trading platform. It’s a win-win-win scenario: the market maker earns revenue between the bid price and the ask price; Robinhood earns money through order flow payment; and consumers benefit from the absence of costly commissions.

PFOF ushered in a new era in investing and leveled the playing field between retail investors and big Wall Street firms. Potential investors are no longer shut out of the market due to high commission fees: they have access to individual stocks, cryptocurrencies and ETFs, literally at their fingertips.

The choice to invest should be left to the investor. It may be true that retail investors are less knowledgeable than other professional traders, but raising barriers for retail investors would not create more knowledgeable investors. Some investors may choose riskier investments, while others opt for safer transactions. However, investing should not be reserved for the wealthy alone.

Despite the obvious benefits of the PFOF, the process has drawn ire from the Securities and Exchange Commission and some Democrats in Congress. Over the summer, SEC Chairman Gary Gensler, a long-time critic of the practice, said a ban on PFOF use was “on the table.” Rumor has it that the SEC could go ahead with its ban in 2022. In Congress, a House committee introduced, in a partisan vote, a bill to study improvements to the PFOF. While studies are generally helpful in determining whether improvements to a particular problem are warranted, the legislation contains a provision that would allow the SEC to ban PFOF prior to the completion of such a study. NTU was a staunch opponent of this legislation when it was introduced to the House Financial Services Committee last summer.

In response to potential attacks on the mechanism that allows commission-free trading, Sen. Pat Toomey (R-Penn.) introduced legislation that would protect investors and the PFOF. His bill, called the Investor Freedom Act, would prohibit the SEC from enacting a blanket ban on PFOF, thereby preserving commission-free trading for all.

Making investing more difficult, more expensive, or less user-friendly is not in the best interests of retail investors.

The widespread adoption of commission-free trading has enabled consumers of all backgrounds and income groups to grow their wealth and has truly democratized investing. Ultimately, the decision to invest should be left to the consumer. While lawmakers may have valid concerns about youth investing, lowering barriers to entry is a positive development made possible in part by commission-free trading. Banning the PFOF could undo this progress and make it more difficult for retail investors to participate in the stock market. Lawmakers should stand on the side of consumers, retail investors and taxpayers in passing Toomey’s important legislation.

About William G.

Check Also

TradeTech: Is innovation in the Close going in the wrong direction?

During a panel discussion at the recent TradeTech 2022 in Paris, panelists expressed concern that …