The European Parliament’s Economic Affairs Committee voted on Wednesday in favour of a draft law from the EuropeanCommission that seeks to ban payment for order flow (PFOF). The pro-ban voteclashes with the decision of EU member states to allow PFOF under specifiedstrict conditions and in countries that chose to adopt it.
Therefore, the vote has pitted EUlawmakers with member states and both parties need to agree on a jointposition that would become law, Reuters reports on Wednesday. The proposed banis one of several draft laws targeted at updating the European Union’s Marketsin Financial Instrument Directives II (MiFID II).
What’s with PFOF?
The payment for order flow is anamount paid by wholesale markets’ participants such asmarket makers and hedge funds to retail brokers so that the latter can redirect some oftheir clients’ orders to them, rather than to exchanges, for execution . The PFOF as a business model for retail brokers became popular through US broker Robinhood which disrupted the establishedbrokerage industry by charging retail traders zero commission and instead generating its revenue from routing their orders to private market makers.
The practice has caught the eyes ofseveral regulators including in the United Kingdom where it has been banned andin the United States and Australia where securities regulators are also considering a ban. Inearly 2021, Public.com, a zero-fee broker, announced that it would no longer route orders tomarket markers but instead send them directly to exchanges for tradeexecution.
Other Propositions of the EU Draft Law
Apart from the ban on PFOF, anotherprovision of the draft law seeks to introduce ‘consolidated tapes’ to provide near real-time prices of stock and bonds. The goal, Reutersreports, is to aid traders in securing the best deals being offered bymultiple platforms that trade the same shares in Europe.
However, exchanges are against thisdevelopment as they profit from selling their market data. Instead, they prefer a tapethat displays prices of already completed trades.
US SEC Proposes Amendment to PFOF Rules
In December 2022, the United StatesSecurities and Exchange Commission (SEC) proposed some amendments to its PFOFrules as it believes that the practice promotes a lack of competition inthe market, costing customers $1.5 billion annually. However, Adam Nasli, the HeadAnalyst at BrokerChooser, says the securities regulator’s estimation “seems high and difficultto believe.”
One of the remedial actions being proposedby the SEC is that certain customer orders should be routed into an openauction where execution providers would compete. The regulator believes thiswill promote competition and help investors secure the best prices.
However, Nasli explained that retailbrokers that get most of their revenue from the PFOF model will be forced torevisit their business model should the proposals be implemented without further adjustments. “Some may even go as far as reintroducingcommissions,” Nasli explained in his commentary on theSEC’s proposal.
The European Parliament’s Economic Affairs Committee voted on Wednesday in favour of a draft law from the EuropeanCommission that seeks to ban payment for order flow (PFOF). The pro-ban voteclashes with the decision of EU member states to allow PFOF under specifiedstrict conditions and in countries that chose to adopt it.
Therefore, the vote has pitted EUlawmakers with member states and both parties need to agree on a jointposition that would become law, Reuters reports on Wednesday. The proposed banis one of several draft laws targeted at updating the European Union’s Marketsin Financial Instrument Directives II (MiFID II).
What’s with PFOF?
The payment for order flow is anamount paid by wholesale markets’ participants such asmarket makers and hedge funds to retail brokers so that the latter can redirect some oftheir clients’ orders to them, rather than to exchanges, for execution . The PFOF as a business model for retail brokers became popular through US broker Robinhood which disrupted the establishedbrokerage industry by charging retail traders zero commission and instead generating its revenue from routing their orders to private market makers.
The practice has caught the eyes ofseveral regulators including in the United Kingdom where it has been banned andin the United States and Australia where securities regulators are also considering a ban. Inearly 2021, Public.com, a zero-fee broker, announced that it would no longer route orders tomarket markers but instead send them directly to exchanges for tradeexecution.
Other Propositions of the EU Draft Law
Apart from the ban on PFOF, anotherprovision of the draft law seeks to introduce ‘consolidated tapes’ to provide near real-time prices of stock and bonds. The goal, Reutersreports, is to aid traders in securing the best deals being offered bymultiple platforms that trade the same shares in Europe.
However, exchanges are against thisdevelopment as they profit from selling their market data. Instead, they prefer a tapethat displays prices of already completed trades.
US SEC Proposes Amendment to PFOF Rules
In December 2022, the United StatesSecurities and Exchange Commission (SEC) proposed some amendments to its PFOFrules as it believes that the practice promotes a lack of competition inthe market, costing customers $1.5 billion annually. However, Adam Nasli, the HeadAnalyst at BrokerChooser, says the securities regulator’s estimation “seems high and difficultto believe.”
One of the remedial actions being proposedby the SEC is that certain customer orders should be routed into an openauction where execution providers would compete. The regulator believes thiswill promote competition and help investors secure the best prices.
However, Nasli explained that retailbrokers that get most of their revenue from the PFOF model will be forced torevisit their business model should the proposals be implemented without further adjustments. “Some may even go as far as reintroducingcommissions,” Nasli explained in his commentary on theSEC’s proposal.
