Robinhood Chief Legal Officer Says SEC Won’t Ban Order Flow Payments

Robinhood’s chief legal officer, who formerly worked at the SEC, said the back-end payment brokers they receive for forwarding transactions from customers to market makers ultimately benefit retail investors.

The Securities and Exchange Commission “concludes that payment for order flow is undoubtedly an astonishingly good thing for retail investors and they won’t ban it,” Robinhood’s Dan Gallagher told CNBC’s “Squawk Box” Monday.

Payment for order flow is one of Robinhood’s biggest sources of income and the way the millennial-favorite stock trading app is able to trade with no commission. Payment for order flow is a controversial practice that has attracted the attention of regulators and Main Street.

Banning payment for the order flow “is on the table,” Gallagher said. “I think they are going to look into this matter thoroughly. I think they have to go through a very arduous process under the law.”

SEC chairman Gary Gensler told Barron’s last month that payment for the order flow “has an inherent conflict of interest.” Gensler said banning the practice is not off the table.

“By Robinhood, [payment for order flow] is the lifeblood of a brokerage with no commission, no minimum balance. This has created a whole new generation of investors,” Gallagher added. “I think it’s overwhelming evidence that the current market structure works well for retail investors.”

After an epic short squeeze in GameStop stock in January that forced Robinhood to restrict trading in certain securities, Robinhood CEO Vlad Tenev was forced to testify before the US House Financial Services Committee in February. Lawmakers criticized the order flow payment for the conflict it has with market makers such as Citadel Securities.

“The idea that customers are stupid, that they need protection, that they need the government and the nanny state to come out and rescue them from making bad decisions, I think they are offended,” Gallagher said.

Gallagher told CNBC that if he were still working for the SEC, he would investigate the people and institutions he believes lied about the GameStop short squeeze.

Robinhood’s shares were unchanged in premarket trading, after closing at $41.17 Friday.