October 28, 2021

Toomey Launches Effort to Preserve Commission-Free Trading

Introduces Investor Freedom Act to Block SEC Overreach on Payment for Order Flow

Washington, D.C. – U.S. Senator Pat Toomey (R-Pa.), Ranking Member of the Senate Banking Committee, today introduced the Investor Freedom Act of 2021 to preserve commission-free trading by prohibiting the Securities and Exchange Commission (SEC) from banning payment for order flow. Payment for order flow—which has been permitted by the SEC for decades—is the very small payment a broker receives for executing a trade on behalf of its customer.

“New innovations—such as zero commission trading and user-friendly mobile apps—have allowed more Americans to participate in the stock market than ever before,” said Senator Toomey. “Such technologies have been made possible in part by payment for order flow. My legislation will stop the SEC from restricting investor freedom under the guise of investor protection by ensuring every day Americans continue to have access to and choices in the stock market.”

Recent developments, such as zero commission trading, no minimum account balances, and user-friendly mobile trading apps, have led to more Americans participating in the stock market than ever before. This market democratization was partly made possible by “payment for order flow,” the practice of retail brokers directing customer trades to wholesale brokers in exchange for a small fee.  Even with such payments, retail customers still obtain better prices on their trades than they would had the order been routed to a public exchange like Nasdaq or the New York Stock Exchange. That’s partly because retail brokers must adhere to SEC and FINRA rules on “best execution” of trades.

Introduction of the legislation comes as reporting indicates that the SEC is considering banning payment for order flow after January’s stock market volatility.

As Senator Toomey pointed out during a Senate Banking Committee hearing in March, more Americans are participating in the stock market now than ever before.

“According to Federal Reserve, in 1989 less than one-third of U.S. households owned stocks,” Senator Toomey said. “Three decades later in 2019, a majority did. The most rapid growth occurred among lower- and middle-income households.

Reports suggest 2020 was a record year for new individual accounts, with investors opening more than 10 million new brokerage accounts. In the absence of payment for order flow, retail customers would likely have to once again pay brokers high commissions for executing stock trades.

The Investor Freedom Act of 2021 would prohibit the SEC, the Financial Industry Regulatory Authority (FINRA), and national securities exchanges—for example, the New York Stock Exchange and Nasdaq—from issuing any rules that prohibit payment for order flow. Brokers would remain subject to the duty of best execution, but would not be deemed to have breached such duty solely by reason of having received payment for order flow.

To read the full text of the bill, click here.