<p>The European Parliament’s Economic Affairs Committee on Wednesday voted in favour of a draft law from the European
Commission that seeks to ban payment for order flow (PFOF). The pro-ban vote
clashes with the decision of EU member states to allow PFOF under specified
strict conditions and in countries that chose to adopt it. </p><p>The vote has, therefore, pitted EU
lawmakers with member states and both parties need to agree on a joint
position that would become law, Reuters reports on Wednesday. The proposed ban
is one of several draft laws targeted at updating the European Union’s Markets
in Financial Instrument Directives II (MiFID II). </p><p>What’s with PFOF?</p><p>The payment for <a href=”https://www.financemagnates.com/forex/the-importance-of-order-flow-in-forex-trading/” target=”_blank” rel=”follow”>order flow</a> is an
amount paid by wholesale markets participants such as
<a href=”https://www.financemagnates.com/terms/m/market-makers/” class=”terms__secondary-term” id=”bbc9bf4f-3ca2-4e0e-bfa4-ff5600362667″ target=”_blank”>market makers</a> and hedge funds to retail brokers so that the latter can redirect some of
their clients’ orders to them, rather than to exchanges, for <a href=”https://www.financemagnates.com/terms/e/execution/” class=”terms__main-term” id=”60010adb-9e25-4bff-9822-c9210deec853″ target=”_blank”>execution</a>. The PFOF as a business model for retail brokers became popular through US broker Robinhood which <a href=”https://www.financemagnates.com/forex/analysis/how-the-race-to-zero-fees-changed-retail-trading-industry/” target=”_blank” rel=”follow”>disrupted the established
brokerage industry</a> by charging retail traders zero-commission and instead generating its revenue from <a href=”https://www.financemagnates.com/forex/brokers/robinhood-hit-with-65m-fine-for-selling-orders-to-third-parties/”>routing their orders</a> to private market makers. </p><p>The practice has caught the eyes of
several regulators including in the United Kingdom where it has been banned and
in the United States and Australia where securities regulators <a href=”https://www.financemagnates.com/forex/regulation/asic-mulls-to-restrict-payment-for-order-flow-model/” target=”_blank” rel=”follow”>are considering a ban</a>. In
early 2021, Public.com, a zero-fee broker, announced that it would<a href=”https://www.financemagnates.com/forex/brokers/public-com-scraps-controversial-payment-for-order-flow-model/” target=”_blank” rel=”follow”> no longer route orders</a> to
market markers but instead will send them directly to exchanges for trade
execution.</p><p>Other Propositions of the EU Draft Law</p><p>Apart from the ban on PFOF, another
provision of the draft law seeks to introduce “consolidated tapes” to provide near real-time prices of stock and bonds. The goal, Reuters
reports, is to aid traders in securing the best deals being offered by
multiple platforms that trade the same shares in Europe.</p><p>However, exchanges are against this
development as they profit from selling their market data. Instead, they prefer a tape
that displays prices of already completed traders.</p><p>US SEC Proposes Amendment to PFOF Rules</p><p>In December 2022, the United States
Securities and Exchange Commission (SEC) proposed some amendment to its PFOF
rules as it believes that the practice promotes a lack of competition in
the market, costing customers $1.5 billion annually. However, Adam Nasli, Head
Analyst at BrokerChooser, says the securities regulator’s estimation <a href=”https://brokerchooser.com/education/news/sec-proposal-risks-pfof” target=”_blank” rel=”follow”>“seems high and difficult
to believe.”</a></p><p>One of the remedial actions being proposed
by the SEC is that certain customer orders should be routed into an open
auction where execution providers will compete. The regulator believes this
will promote competition and help investors secure the best prices.</p><p>However, Nasli explained that retail
brokers that get most of their revenue from the PFOF model will be forced to
revisit their business model should the proposals be implemented without further adjustments. “Some may even go as far as reintroducing
commissions,” Nasli explained in <a href=”https://brokerchooser.com/education/news/sec-proposal-risks-pfof” target=”_blank” rel=”follow”>his commentary</a> on the
SEC’s proposal.</p>
This article was written by Solomon Oladipupo at www.financemagnates.com.
