Australian regulator weighs further payment for order flow restrictions

  • Australia's corporate regulator on Wednesday proposed imposition of further restrictions on payment for order flow (PFOF) practices to include arrangements between non-market participant intermediaries.
  • The practice of PFOF involves retail brokers sending customer orders to wholesale brokers rather than exchanges, for a slightly better execution price, and accepting payments and rebates from the wholesalers in return.
  • The Australian Securities and Investments Commission's move comes on the back of a retail trading frenzy in the United States that thrust online brokerages such as Robinhood Markets Inc into the mainstream.

Australia's corporate regulator on Wednesday proposed imposition of further restrictions on payment for order flow (PFOF) practices to include arrangements between non-market participant intermediaries.

The practice of PFOF involves retail brokers sending customer orders to wholesale brokers rather than exchanges, for a slightly better execution price, and accepting payments and rebates from the wholesalers in return.

The Australian Securities and Investments Commission's (ASIC) move comes on the back of a retail trading frenzy in the United States that thrust online brokerages such as Robinhood into the mainstream.

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The ASIC "has identified its rules do not deal with certain PFOF scenarios … and proposes to close this regulatory gap," it said.

"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," the regulator added.

The U.S. Securities and Exchange Commission is already scrutinizing PFOF over concerns it might incentivize brokers to send customer orders to places that maximize their own profit, rather than to places that would get their customers the best execution, and other potential conflicts of interest.

The ASIC said it would seek feedback on its proposal until Nov. 3.

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