Payment for order flow: Difference between revisions

Payment for order flow (view source)

Revision as of 08:58, 29 January 2021

2,453 bytes added , 29 January 2021

no edit summary

Amwelladmin

Bureaucrats, Interface administrators, Administrators

83,057

edits

@@ Line 1: / Line 1: @@
-Oh lord, where to start. Well, the {{tag|FCA}} has been commendably plain in its guidance.
+{{a|g|}}Oh lord, where to start. PFOF was a big deal in Europe for years, and the Americans — usually such fastidious over-regulators — have been strikingly blasé about it. Much of the American love of playing the markets depends on it, in point of fact. All this was brought into sharp, public relief, in the great market un-crash of January 2021, when the massed armies of the investing public — for so long a huge, docile cow, tethered to the stall and irretrievably wired into the great [[financial services]] milking machine — woke up and decided to have things their way for once. Millking machine reacted rather petulantly. In a turn of events that is rather characterising the digital revolution, they discovered they were the product, not the customer, and the means of that transmission was [[payment for order flow]].
+===What is PFOF?===
+The theory is — ought to be — when your order is filled you pay your broker a commission. Your broker has all kinds of regulatory obligations — the key ones are generally lumped together and called “[[best execution]]” — to make sure you get the best price available. This keeps the broker honest.
+Okay. Now a broker fills your order by going to the market. In practice this means The broker will interrogate [[market maker|market makers]], [[Exchange|exchanges]] and other sources of market liquidity ([[Multilateral trading facility|multilateral trading facilities]] [[dark pool]]s and so on), to identify that best price, retrieve it and bring it back for you.
+Note the inherent asymmetry here: on one side of the broker millions of tiny investors, Each paying teeny commissions. On the other side, a small number of market intermediaries, each of Home hopes to handle a vast volume of transaction, charging even teenier commissions, but in such colossal quantities that in aggregate it makes a ''lot'' of money.
+The more order flow an [[market-maker]] gets, the more money it makes. Like brokers, market-makers are [[Agency problem|agents]]: they do not take a principal position, but merely route customer orders to the market. Their revenue is an annuity: it depends on ''volume''. [[Market-makers]] will (if they are allowed to) happily pay “[[Retrocession|retrocessions]]” for volume to individual brokers. They pay, in other words, for order flow.
+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.
+The [[GameStop]] [[market un-crash]] of 2021 has highlighted, starkly, that [[conflict of interest]].
+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 firm that executes client orders (typically a broker) receiving a fee/commission not only as an agent from the client originating the order but also from the counterparty with whom the trade is then executed (typically a [[market maker]]).
 {{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.