The EU Agrees on New Deal to Ban PFOF
The European Union (EU) has agreed on a new deal to ban PFOF, or Payment for Order Flow.
PFOF is the compensation a broker receives for routing trades for trade execution to a particular market maker.
The European Union said on Thursday that member states and the European Parliament have reached a deal on updating the bloc’s “MiFID” securities trading rules.
The EU has been reviewing its securities trading rules to reflect advances in trading technology and also the departure of Britain from the bloc, presenting new competition to EU markets, per Reuters.
“The agreement reached today imposes a general ban on ‘payment for order flow’ (PFOF), a practice through which brokers receive payments for forwarding client orders to certain trading platforms,” a statement from the EU member states’ council said.
Under the deal, member states that already allow PFOF will be exempt from the ban provided it is only offered to clients in that member state.
“However, this practice must be phased out by 30 June 2026,” the statement said.
The deal, which needs formal rubber-stamping from the full parliament and EU states, also sets up ‘consolidated tapes’ that would give investors a snapshot of stock and bond prices on markets to help find the best deals.
“Market data from all trading platforms will be included in consolidated tapes, which will aim to publish the information as close as possible to real time,” the statement said.
Will the U.S Ban PFOF?
As of right now, the SEC has stated that there is no plan to ban PFOF although the topic has been brought to the table.
SEC Chairman Gary Gensler last year said there may be a conflict of interest for brokers and that too much power is concentrated in a handful of market makers.
The abusive power of PFOF was felt during the ‘meme stock’ frenzy of 2021 when retail orders were being dealt by market makers and hedge funds betting against AMC Entertainment and GameStop stock.
But Citadel and other Wall Street giants have pushed back against the idea of banning payment for order flow.
A spokesperson for Citadel Securities released the following statement to CNBC:
“It is important to recognize that the current market structure has resulted in tighter spreads, greater transparency, and meaningfully reduced costs for retail investors. We look forward to reviewing the proposals and working with the SEC and the industry towards our longstanding objective of further improving competition and transparency.”
“You need to be very deliberate on that approach,” Ken Bentsen, president and CEO of the Securities Industry and Financial Markets Association (SIFMA) said.
“We have been calling for a review of market structure for some time, but let’s be careful not to try to fix things that may not be broken,” he said. “The retail investor is getting a better deal than they ever have.”
Read: “The Game is Rigged” Says Ex-Citadel Data Scientist
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