People who trade stocks online cheered last week when several large retail broke...
Canada has banned the practice. The United Kingdom recently put it under review and said in September that nearly all UK-based brokerages acting in an agency capacity had stopped accepting payment for order flow.
Professional traders covet retail orders because unlike large institutional investors with large portfolios and orders that are big enough to move the market, retail investors tend to be less informed as to which way a stock is likely to be moving and their orders are generally smaller. In trading circles, this is known as “dumb money.”
“The better the execution price the less money the market maker earns,” he said in an email. “But this has been the story forever on Wall Street. This is how the large investment banks make about $250 billion per year. They call it ‘trading profits.’” Brett Redfearn, the SEC’s director of trading and markets, said in March that enhanced disclosures would “enable greater transparency into any potential trade-offs being made between payment for order flow and execution quality.”Payment for order flow is a growing revenue stream in an ultra-competitive industry in the middle of a price war. But it is not the biggest source of income for online brokers, and not all accept it. Fidelity, for one, does not.
But in more recent years, online brokers like Schwab and TD Ameritrade have come under mounting competition from startup fintech companies that have embraced payment for order flow as a way to cut out trading commissions entirely.
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