Ban payment for order flow on Wall Street? Fat chance!
That is essentially the view of Thomas Peterffy, founder and chairman of Interactive Brokers Group Inc.
, on the challenges that the Securities and Exchange Commission faces as it considers eliminating a Wall Street practice that has existed for decades: payment for order flow.
‘I do not see how he gets it done without ruffling a lot of feathers.’
— Thomas Peterffy, founder Interactive Brokers Group
In an interview with MarketWatch, the Hungarian-born billionaire Peterffy, who was one of the pioneers of computerized stock trading, said he doesn’t see a ban on payment for order flow, or PFOF, happening under Chairman Gary Gensler’s tenure because implementing such restrictions may be too challenging. And even with a policy in place, institutions could still finagle workarounds.
“The only thing [Gensler] could do is to force all trading to take place on exchanges,” Peterffy said. Even then, trades could be further internalized or brokers could work out other agreements with market makers, he said.
Comments from Peterffy, who owns around 75% of Interactive Brokers Group and boasts a net worth of $20 billion, according to Forbes, come after a report from Barron’s Avi Salzman offered the clearest take on Gensler’s view on payment for order flow since he was sworn in as SEC chairman in mid-April.
Gensler told Barron’s, in an interview published on Monday, that a full prohibition of payment for order flow was “on the table” as part of a broader agency review.
Such payments have become closely linked to online brokerages like Robinhood Markets Inc.
The practice allows brokers offer commission-free services to individual investors.
In PFOF, online brokers accept payments from high-speed trading firms in exchange for routing their customers’ stock and options orders. As The Wall Street Journal has explained, trading firms profit by collecting the small difference between the spread, or the price at which shares are bought and sold. Under SEC rules, firms can’t fill buy or sell orders at prices worse for the customer than the best price available on an exchange, which is known as the National Best Bid or Offer, or NBBO.
Trading firms also collect valuable information about momentum and sentiment in the market, which also unsettles critics.
Gensler told Barron’s that PFOF has “an inherent conflict of interest.”
Market makers “get the data, they get the first look, they get to match off buyers and sellers out of that order flow,” he said. “That may not be the most efficient markets for the 2020s.”
Back in June, the SEC chairman said that the regulator was reviewing the practice. Gensler said the practice
Peterffy says Interactive Brokers offer investors that use its platform an option: 0% commission or pay a commission and get better execution on trades.
The Interactive Brokers founder said the fact that the most trading happens off public exchanges is a part of the broader payment for order flow issue. He suggested that it was unlikely that banks would be eager for changes to market structure that would force more trading in public markets or lighted markets because that would shrink revenue from their off-exchange platforms.
“I do not see how he gets it done without ruffling a lot of feathers,” Peterffy said of efforts to ban payment for order flow and making trading more transparent.
“I don’t think [Gensler] likes that so much of trading is in the dark,” the investing veteran said.
Peterffy says that one solution to shedding more light on off-exchange trading is to provide a monthly publication of execution marked against the NBBO on all exchanges, lighted or dark. That would provide fuller disclosures on price execution and to show how much customer’s pay on average based on volume-weighted average prices, or VWAP.
Peterffy speculated that just eliminating PFOF without also pushing for more trading in public exchanges would likely result in firms like Citadel Securities purchasing Robinhood, or Charles Schwab
purchasing firms such as Virtu Financial
Trade-service arrangements where Robinhood, for example, pays Citadel for trading services, could also be used as workarounds to a PFOF ban.
Shares of Robinhood were up 0.3% on Tuesday, those for Virtu Financial, a high-speed trading venue that has been one of the most vocal advocates for PFOF, saw its shares down 1%. By comparison, the Dow Jones Industrial Average
and the S&P 500
were down by around 0.1%, and the Nasdaq Composite Index
was ended less than 0.1% lower on Tuesday.
PFOF came under increased scrutiny following a surge in volatility centered around trading in stocks like GameStop Corp.
earlier this year, and later AMC Entertainment Holdings
on platforms like Robinhood.