EFFORTS TO SUE THE SEC OVER BROKER-INDUCEMENT REGULATION UNLIKELY TO SUCCEED

Abstract

This article considers a rulemaking effort underway at the Securities and Exchange Commission (SEC) to regulate the conflicts of interest that result when brokers send client orders to venues that pay the broker a fee in exchange for routing to them. These payments for order flow or rebates present a distortive conflict to a broker's duty of best execution that has troubled the SEC for over 40 years and which the SEC has tried to regulate through multiple reforms. The SEC's new Chairman has indicated he will more forcefully address broker conflicts. A number of regulated entities have threatened to challenge the rule in court.

Keywords: SEC, Robinhood, trading app, order flow, PFOF, rulemaking

JEL Classification: K2, K20, K22