Are you for or against payment for order flows?

Payment for order flows is the practice by which brokerages sell their customer’s orders to market makers in order to guarantee instant execution at the market price or better.

Some critiques say that payment for order flows creates a conflict of interest between the broker’s duty to seek the best execution for trades versus its desires to maximize its own profits.

Others say that market makers like Citadel - the antagonist of the book “Flash Boys” by Michael Lewis which takes a deeper look at high frequency trading and the need for speed (literally); use payment for order flows to front run buy/sell orders and earn a profit by edging out investors.

Proponents of the system say that payment for order flows gives investors a better price than the market price (i.e., if the front running claims are bogus :man_shrugging:) while also enabling the emergence of zero commission trading.

At the end of the day, it all sounds like pennies on the dollar. But just take a look at how big those pennies have become: -

In 2020, brokers collected almost $2.6 billion in payment for order flows. This was followed by the volatility in $GME stock which lead to SEC acting chairwoman Allison Herren Lee writing a letter for the review of the practice.

Fast forward to present day, Gary Gensler, chair of the SEC, said on Wednesday that he had asked the agency’s staff to make recommendations to amend a host of market structure rules, including, you guessed it, payment for order flows. The announcement sent shares in the trading company Virtu Financial (which pays brokers for their orders) down 7.7%.

If you made it to the end, let me know what your thoughts are on this conundrum.

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