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Payment for order flow: Difference between revisions
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Amwelladmin (talk | contribs) (Created page with "Oh lord, where to start. Well, the {{tag|FCA}} has been commendably plain in its guidance. ===What is payment for order flow (PFOF)?=== PFOF is the practice of an investment...") |
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*It creates a conflict of interest between the [[broker]] and its clients because the [[broker]] is incentivised to pursue payments from [[market maker|market makers]] rather than to provide {{tag|best execution}} in the interests of their clients. | *It creates a conflict of interest between the [[broker]] and its clients because the [[broker]] is incentivised to pursue payments from [[market maker|market makers]] rather than to provide {{tag|best execution}} in the interests of their clients. | ||
*It undermines the transparency and efficiency of the price formation process. This is because the prices paid by clients include hidden costs – and whilst clients may be aware of the level of commission they pay to their [[broker]]s – they might not be aware of the higher spread that they may additionally need to pay to take account of the fees paid by the market marker. | *It undermines the transparency and efficiency of the price formation process. This is because the prices paid by clients include hidden costs – and whilst clients may be aware of the level of commission they pay to their [[broker]]s – they might not be aware of the higher spread that they may additionally need to pay to take account of the fees paid by the market marker. | ||
*Forcing market makers to ‘pay-to-play’ can distort competition by creating barriers to entry and expansion. Indeed, if brokers refuse to look beyond fee-paying market makers, the most obvious way for new market makers to enter the market is to offer payment for order flow that is higher than the rates paid by existing market makers – an outcome that is inconsistent with promoting effective competition in the interests of consumers. Our supervisory work indicates that, for the most part, brokers routinely exclude non-paying market makers. This approach can result in poorer price outcomes for clients because, in addition to the wider spread that the client is likely to pay to account for the fees paid by the market maker, these ‘non-paying’ market makers might otherwise provide the most competitive pricing.}} | *Forcing market makers to ‘pay-to-play’ can distort competition by creating barriers to entry and expansion. Indeed, if brokers refuse to look beyond fee-paying market makers, the most obvious way for new market makers to enter the market is to offer payment for order flow that is higher than the rates paid by existing market makers – an outcome that is inconsistent with promoting effective competition in the interests of consumers. Our supervisory work indicates that, for the most part, brokers routinely exclude non-paying [[market maker|market makers]]. This approach can result in poorer price outcomes for clients because, in addition to the wider spread that the client is likely to pay to account for the fees paid by the market maker, these ‘non-paying’ [[market maker|market makers]] might otherwise provide the most competitive pricing.}} | ||
As of September the {{tag|FCA}} has concluded: | As of September the {{tag|FCA}} has concluded: | ||
*The large integrated [[investment bank]]s have largely stopped charging {{tag|PFOF}} in respect of all client business and across all market segments. (This is as close as a regulator will ever get to saying “hooray for investment banks”!) | *The large integrated [[investment bank]]s have largely stopped charging {{tag|PFOF}} in respect of all client business and across all market segments. (This is as close as a regulator will ever get to saying “hooray for investment banks”!) | ||
*Independent [[broker]]s have mainly stopped charging {{tag|PFOF}} to professional clients. | *Independent [[broker]]s have mainly stopped charging {{tag|PFOF}} to professional clients. | ||
*Some independent brokers continue to charge [[market maker|market makers]] commission in return for order flow in respect of [[ECP]] initiated business. Here, the FCA still believes purported management of inherent [[conflict of interest|conflicts of interest]] in PFOF are inadequate in light of {{fcaprov|SYSC | *Some independent brokers continue to charge [[market maker|market makers]] commission in return for order flow in respect of [[ECP]] initiated business. Here, the FCA still believes purported management of inherent [[conflict of interest|conflicts of interest]] in PFOF are inadequate in light of {{fcaprov|SYSC 10}}. Nor would they satisfy the expectations under {{tag|MiFID II}}. | ||
10}}. Nor would they satisfy the expectations under {{tag|MiFID II}}. | |||
===See also=== | ===See also=== | ||
The FCA's [https://www.fca.org.uk/sites/default/files/marketwatch-51.pdf FCA Marketwatch 51] released on 1 September 2016 — from which the above is extracted — should give you what you need. If that isn't enough, have a look at the FCA's original Thematic Review [https://www.fca.org.uk/publication/thematic-reviews/tr14-13.pdf TR 14/13] of [[best execution]] and [[PFOF]]. | The FCA's [https://www.fca.org.uk/sites/default/files/marketwatch-51.pdf FCA Marketwatch 51] released on 1 September 2016 — from which the above is extracted — should give you what you need. If that isn't enough, have a look at the FCA's original Thematic Review [https://www.fca.org.uk/publication/thematic-reviews/tr14-13.pdf TR 14/13] of [[best execution]] and [[PFOF]]. | ||