The increase in scrutiny will continue to bolster calls for heightened reporting obligations, such that more information can be gathered to gain insight into how exactly best execution principles are being practised and whether zero commission trading is benefitting retail investors or financial institutions. ESMA has provided a warning that in their view, there is uncertainty as to whether receiving commissions for providing order flow would be ‘compatible with MiFID II’. ![]() The conflict of interest created when brokers are solely reliant on earning fees for selling order flow has created a headache for regulators, especially with the volume and transparency of data to handle. There has been a lot of debate around the introduction of PFOF in Europe, with key lawmakers calling for an outright ban, although no decision has been reached yet. Does PFOF Contravene MiFID II Best Execution Principles? Detractors call for more transparency on best execution to combat the opaque nature of off-exchange trading. ![]() The critics aren’t convinced and point to the clear lack of competition amongst the dominant players, with one wholesaler in particular, handling 25% of US equity transactions. ![]() Advocates argue that freedom from some of the rules governing exchanges means that they are often able to get clients a better price. This transition caused a steady increase in off-exchange trading from 11% in 2004 to 40% in 2022 as major wholesale vendors paying for the order flow routed the trades through dark pools or internalised them against their own book. As commissions charged on retail stock broking have decreased, eventually to zero, other brokers have had to match or offer similar incentives to compete.
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