The Congressional Research Service (“CRS”) revised the role of “payment for order flow” (“PFOF”) in “the surge in securities trading by retail investors at large discount brokers”.

In its report, CRS described the PFOF as a controversial rebate subsidizing “non-existent commissions”. CRS said that when broker-traders do not pass PFOF discounts on to clients, the economic incentives to send retail orders to discount market makers create potential conflicts of interest. CRS noted that this argument explained why the UK had “effectively banned” the FFPO.

PFOF supporters argue that investors benefit from subsidized, low or no commission rates. Critics argue that the PFOF raises conflict of interest issues regarding brokers’ best execution duty.

Comment

While payment for order flow is a legitimate area of ​​discussion, the bigger issue is why clients don’t use full-service brokers who provide them with some level of advice. Congress and the SEC should consider whether over-regulation and the threat of enforcement action is killing full-service brokerage business, leaving retail clients essentially alone.

Unfortunately, questioning whether regulation can be excessive or have unintended consequences is not a current priority. The tendency in response to any unusual event is rather to seek to pass more regulations, as if more rules are always the panacea. Whether or not the order flow payment occurs, the most significant reality is that retail investors are now effectively being pushed to seek their investment advice not from a regulated institution, but from a subreddit. See in general GameStop: regulators should focus less on “solving the problem”; Learn more about “Making it better”.

Primary sources

1. CRS Report: Broker-Dealers and Order Flow Payment

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