Agency with a view to retail brokerage apps

Gary Gensler, chairman of the SEC, told CNBC on Friday the agency is looking into how commission-free retail broker apps encourage more stock trading and then make money doing those deals.

“There’s a small conflict of interest,” Gensler said in Squawk Box the day after he testified to the House Financial Services Committee about the issue. “An app that says it has no commissions generates revenue from your trade by doing something called ‘paying for the flow of orders’. Somebody pays them for that flow of orders and pays them for that data.”

Gensler said the problem lies in what is known as gamification apps use such as “props, leaderboards, behavioral methods to get individuals to act more” and how apps market their platforms.

When asked what should be done to change or regulate gamification and payment for order flow practices, Gensler said he is reserving judgment while the Securities and Exchange Commission seeks public comment on the matter.

However, he said, “Disclosure alone cannot do it.”

In December, Robinhood agreed to pay a $ 65 million civil fine without admitting or denying SEC fees that the popular trading app misled customers about how it made money and promised best execution from stores fail to deliver.

“One of Robinhood’s selling points to clients was that the deal was ‘commission free’, but in large part due to the unusually high payment for order flow rates, Robinhood clients ‘orders were filled at prices below other brokers’ prices.” The SEC said at the time, about a month before Robinhood became a central figure in the GameStop saga.

At the time, a Robinhood spokesperson said the company was “completely transparent” in its communications with customers about its current revenue streams and had improved its best execution processes.

Gensler acknowledged that trading apps on smartphones has certainly brought new investors into stock trading and given them better access to the markets. But he said that as technology changes the way people interact with markets, regulations need to keep pace to protect investors.

Gensler was sworn in last month as President Joe Biden’s decision to head the SEC, which serves as Wall Street’s watchdog. During Barack Obama’s presidency, Gensler headed the Commodity Futures Trading Commission, which regulates derivatives such as futures, swaps, and certain types of options.

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