Explainer-SEC eyes Wall Street reforms. What is ‘PFOF’?
By John McCrank
NEW YORK (Reuters) -The top of the U.S. Securities and Change Fee on Wednesday mentioned the company might suggest probably the most wide-ranging reforms to the equities market in practically 20 years. The proposed guidelines would rein in a observe known as fee for order move (PFOF), which is banned in Canada, the UK, and Australia.
WHAT IS PFOF?
Retail brokerages ship most buyer orders to wholesale brokers, reasonably than to exchanges, as a result of wholesalers usually execute orders at a barely higher value than is offered on exchanges. Most retail brokers additionally settle for rebates, or funds, from wholesalers in return for buyer orders.
SEC Chair Gary Gensler mentioned buyers may get higher costs with out PFOF if there was extra competitors to execute retail orders. He advised sending orders to auctions, to enhance offers for retail buyers.
HOW COMMON IS PFOF?
In america, the observe is disclosed in quarterly regulatory filings, has been a rising income for a lot of brokers as retail buying and selling volumes have surged.
Some retail brokerages, together with Charles Schwab Corp and Robinhood Markets Inc, settle for PFOF, whereas others, together with Constancy and Public.com, don’t.
Within the first quarter, Robinhood made round three-quarters of its income from PFOF. Round 12% of Robinhood’s PFOF got here from equities, whereas the remainder got here from choices and cryptocurrencies. It has mentioned the observe permits it to supply commission-free buying and selling.
Gensler mentioned many corporations that don’t settle for PFOF nonetheless supply commission-free buying and selling. He additionally advised decreasing the time increments for disclosure of the observe.
WHY DOES IT MATTER?
The SEC is wanting into whether or not PFOF creates an incentive for brokers to route buyer orders to locations that maximize their very own income reasonably than one that may get the purchasers the most effective execution.
Gensler additionally expressed considerations that commission-free buying and selling brokerages might encourage buyers to commerce extra as a result of quantity boosts their very own income even when extra buying and selling will not be within the buyers’ greatest curiosity.
IS REGULATORY SCRUTINY OF PFOF NEW?
No. PFOF has been round for many years and the SEC has traditionally targeted on disclosure of the observe. The elevated scrutiny is because of progress of the observe in recent times, as commission-free buying and selling fashions have turn into the norm, together with an related improve in off-exchange buying and selling.
ISN’T COMMISSION-FREE TRADING A BENEFIT TO EVERYONE?
In December 2020, the SEC fined Robinhood $65 million for failing to correctly inform clients about PFOF it obtained that resulted in these clients paying larger costs to execute trades.
The regulator mentioned sure wholesalers instructed Robinhood there was a trade-off between PFOF and value enchancment for patrons, and Robinhood “explicitly supplied to simply accept much less value enchancment for its clients in change for receiving larger” PFOF.
The SEC mentioned prices to Robinhood’s clients “may need exceeded any financial savings they may have thought they’d gotten from zero fee buying and selling.” Robinhood settled with out admitting or denying the costs.
(Reporting by John McCrank; Modifying by David Gregorio)
