Australia wants to ban PFOF as practice comes under greater scrutiny

Rick Steves

“Payment-for-order-flow arrangements create conflicts of interest that can lead to poor client outcomes. It can also negatively impact market liquidity and pricing. In our view, these harms outweigh the benefits.”

Could ASIC ban CFD trading in Australia?

ASIC has proposed amendments to the prohibition on order incentives in the ASIC market integrity rules after having identified that its rules do not deal with certain payment-for-order-flow scenarios such as arrangements between non-market participant intermediaries.

Australia’s financial watchdog wants to close this regulatory gap, although it admits payment for order flow is not prevalent in the Australian equity market.

With the rise of payment for order flow (PFOF) in other markets, especially in the United States, and their controversial impact, regulators across the globe have been taking a closer look at it.

PFOF  is an arrangement whereby one person buys client order flow from another person, in exchange for a payment or other incentive. It is currently prohibited among market participants.

According to Australia’s regulatory framework, a market participant must not, directly or indirectly, make a cash payment to another person for their order flow, if the cash payment leads to the net cost being less than the value of the reported price for the transaction(s).

‘Net cost’ means that a market participant cannot pay more for order flow than the commission received by the market participant for those orders – that is, it prohibits PFOF if it results in a ‘negative commission’”, ASIC explained.

“Payment-for-order-flow arrangements create conflicts of interest that can lead to poor client outcomes. It can also negatively impact market liquidity and pricing. In our view, these harms outweigh the benefits.”

This has led ASIC to consider the application of the existing prohibition on payment for order flow in the context of recent developments in Australia and abroad. A

The regulator’s proposal aims to amend the current prohibition with a proactive measure intended to avoid the emergence of payment for order flow arrangements in Australia. The consultation period will end on 3 November 2021.

PFOF has come under great scrutiny after the short squeeze in the Gamestop share triggered by the army of small traders gathered in the WallStreetBets subreddit. On the other side of the trade were mostly short order from Melvin Capital.

Robinhood was forced to restrict trades, claiming it could not deal with the t+2 settlement cycle under so much market volatility. The neobroker has a PFOF agreement with Citadel Securities, which in turn kept Melvin Capital liquid with a $2 billion injection during the short squeeze.

The Robinhood – Citadel – Melvin Capital triangle triggered the rise of conspiracy theories among small investors on social media platforms.

Read this next

Retail FX, Technology

MetaTrader’s iOS issue opens brokers’ eyes to other trading platforms

In a surprising (or-not-so-surprising) move, Apple has removed MetaTrader 4 and MetaTrader 5 from its App Store in a huge blow for the leading FX trading platform provider.

Retail FX

Pepperstone adds Capitalise.ai analytics and automated trading tools free of charge

“We look forward to bringing significant value to Pepperstone traders and making a real, positive impact in their daily trading habits. We are excited to welcome them on board.”

Retail FX

FP Markets wins Best Global Value Broker for 4th consecutive year at the 2022 Global Forex Awards

“We greatly appreciate the continued international recognition as at FP Markets we pride ourselves on these attributes and these prestigious awards are testament to the hard work from our global team to always provide our clients with the ultimate trading experience.”

Inside View

How to Engage Your Customer at Every Stage of Their Journey

As many as 89% of successful businesses say that providing assistive customer experiences is critical to their growth. That’s because a mere 5% increase in customer retention can boost profits by 25% to 95%.

Industry News

CFTC fines Chinese firms Chinatex and COFCO $720,000 for wash trading

Chinatex traders engaged in wash trading in order to liquidate a long position in the account of an affiliated company and re-establish the position in its own account, to the ultimate benefit of its parent company, COFCO.

Industry News

US-based operation of Brazilian broker XP fined $500,000 for recordkeeping failures

“Proper recordkeeping is vital to protecting our markets and market participants from fraud and manipulation. This case serves as another example of the Commission’s intent to vigorously enforce the recordkeeping obligations of its registrants.”

Digital Assets

Bitfinex announces integration of USDt on Polkadot

Polkadot is the brainchild of British computer programmer and Ethereum co-founder and former CTO Gavin Wood.

Executive Moves

FPG hires ex-Fireblocks Chris Hazelton to head marketing at crypto prime broker

“Chris’s experience as a marketing leader at several exceptional businesses will help us refine our message to an institutional audience that’s overwhelmed with new information and show tangible examples of how we’ve helped customers like them scale successfully in crypto.”

Podcasts

FinanceFeeds Podcast Ep. #6: Gold-i’s Tom Higgins talks efficiency in FX and inner workings of Crypto Switch

On its sixth episode, the FinanceFeeds Podcast welcomed Tom Higgins, the founder and chief executive of trading systems integration provider, Gold-i.

<