Robinhood calls potential payment for order flow ban 'draconian' as it fires back at SEC's Gary Gensler

• Robinhood said a potential SEC ban of payment for order flow would be "draconian" in an interview with Barron's.
• SEC Chairman Gary Gensler told Barron's last week that a PFOF ban was under consideration.
• Robinhood derived about 80% of its revenue from payment for order flow transactions in Q2.
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Robinhood is hitting back at recent comments from SEC Chairman Gary Gensler, who said a payment for order flow ban was under consideration at the agency last week.

Robinhood's chief legal officer Dan Gallagher told Barron's on Thursday that "the idea of banning payment for order flow is pretty draconian." About 80% Robinhood's second quarter revenue was derived from the PFOF practice. Gallagher admitted to Barron's that Robinhood has to work at diversifying its revenue base.

Gallagher pointed out that banning PFOF would be harmful to the retail investors, as it allows the brokerage industry to offer commission-free trading and fractional share investing.

"This is the revenue that provided us the ability to offer commission-free trading with no minimum balance," Gallagher explained, adding that "abandoning it would be such a negative thing for retail investors."

Gensler's main concern on PFOF is the fact that much of the trades are routed to off-exchange market makers like Citadel Securities, which could result in a less favorable execution price for the end investor. Gensler did not tell Barron's if the SEC found any instances where PFOF practices harmed retail investors.

The potential ban of PFOF has left Robinhood investors on edge over the past week, with the stock down about 7% since Gensler's comments.

To block a potential SEC ban of PFOF, Gallagher told Barron's it would go to court and sue the regulatory agency. "We'd have to get in line. There would be a long line of folks that would sue," Gallagher said. But before it comes to that, Robinhood plans to meet with the SEC to make its case for the practice.

"They are going to realize that payment for order flow is an amazingly good thing for investors," Gallagher said.