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Payment for order flow: Difference between revisions
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They are allowed to in the US; they are not in the UK. The FCA banned payment for order outright about five years ago on the theory that it undermines transparency and efficiency, is inimitable to the idea of [[best execution]], and also it creates a perceived conflict of interest between broker and clients. | They are allowed to in the US; they are not in the UK. The FCA banned payment for order outright about five years ago on the theory that it undermines transparency and efficiency, is inimitable to the idea of [[best execution]], and also it creates a perceived conflict of interest between broker and clients. | ||
In the US the dynamic is very different. Payment for order flow allows the retail platforms (Ameritrade, Schwab, eToro, RobinHood etc) to offer ''commission free'' trading. Like in Vegas, ''if the drinks are free, you are paying some other way''. Most retail folks are happy enough with that trade: brokers have to disclose their PFOF arrangements. Sunlight is the best disinfectant, right? But for the most part the [[conflict of interest]] is more optical than fundamental: neither the broker nor the market-maker has a dog in the fight: as long as the trade gets done, everyone gets their little [[Look, I tried|nibble on the client’s parcel]] and all is well in the world. | |||
The [[GameStop]] [[market un-crash]] of 2021 has highlighted, starkly, that [[conflict of interest]] becomes a bit more visceral when it turns out the [[market maker]]’s ''brother'' has a dog in the fight. Some [[market-maker]]s are part of bigger [[financial services]] organisations, and may also have a [[broker-dealer]], an [[asset manager]] and even — [[dramatic look gopher —a [[hedge fund]] in the same market. Now if the [[hedge fund]] is short a stock that retail markets are buying like crazy through the trading platform then — hold on tiger. If ''all'' the long interest is coming through the retail platform, and all the short interest is institutional, then if the activity on the platforms can be dampened somehow — you know, by the platform suddenly shutting down the ability for punters to put risk on, and only allowing them to take risk off — that makes the job of shorting the shit out of the market a lot easier. | |||
===UK regulation=== | |||
Well, the {{tag|FCA}} has been commendably plain in its guidance. | Well, the {{tag|FCA}} has been commendably plain in its guidance. | ||
{{box|The {{tag|FCA}} considers {{tag|PFOF}} to be bad for our markets and a direct risk to all three of the FCA’s operational objectives for the following reasons: | {{box|The {{tag|FCA}} considers {{tag|PFOF}} to be bad for our markets and a direct risk to all three of the FCA’s operational objectives for the following reasons: | ||
*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 its 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 its clients. | ||
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*[[GameStop]] and the great [[market un-crash]] of 2021 | |||
*[[Conflict of Interest]] | |||
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]]. | ||
*[[Inducements]] and the rule against them. | *[[Inducements]] and the rule against them. | ||