US buy-side warily eyeing changes to payment for order flow, finds report

Coalition Greenwich report found that almost half of equity traders see proposed changes to payment for order flow (PFOF) as the most important ongoing regulatory initiative.

Amidst the host of regulatory and structural proposals ongoing in the market, the institutional buy-side in the US see proposed changes to the payment for order flow (PFOF) regime as the most crucial, a report by Coalition Greenwich has found.

In its latest study examining the buy-side’s perspective on the expected biggest regulatory and market structure debates in the year to come, Coalition found that 40% of institutional equity traders in the US peg PFOF as the one to watch.

Payment for order flow (PFOF) is a form of compensation that comes in the form of the transferring some of the trading profits from market makers to brokerages in return for directing orders from varying parties to be executed with them.

It’s proved a contentious topic globally as many argue this order flow – a large part of it coming from the growing retail segment – should instead be won by publishing competitive quotes.

At the end of last year, the US’ Securities and Exchanges Commission (SEC) confirmed it would be exploring potential changes to the PFOF regime because of inherent conflicts of interest within the system.

Across the pond, the European Commission moved to ban PFOF for high frequency traders organised as systematic internalisers (SIs) in November as part of its Capital Markets Union update, instead outlining that in order to win this business firms must instead publish competitive pre-trade quotes in a bid to level the playing field.

“Depending on which camp you’re in, you might see PFOF as either a well-regulated part of the trading landscape or a part of an insidious system rigged against all but the biggest players,” says Shane Swanson, senior analyst at Coalition Greenwich market structure and technology, and author of the report.