FLASH FRIDAY is a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet, a Nomura company.
When Americans mentioned a football game in London last weekend, English people assumed they meant the US women’s football team playing England in a high-profile friendly fixture. The game was the fastest selling for the England football team – men or women – at Wembley Stadium and the Lionesses, the newly-crowned European champions, duly obliged by beating the world champions.
However, the Americans were actually referring to three National Football League games being played in London. The Minnesota Vikings have played New Orleans Saints and the New York Giants went head to head with the Green Bay Packers at Tottenham Hotspur Stadium. On October 30 Wembley Stadium will host the Denver Broncos against the Jacksonville Jaguars. As ever, the two countries are divided by a common language.
The two countries are also divided in certain aspects of market structure and regulation. The UK Financial Conduct Authority does not allow payment for order flow, while in the US retail trades are not executed on exchanges but instead most are sold to market makers under payment for order flow agreements. US retail investors can typically trade for free and market makers argue PFOF provides price improvement and has democratized access by reducing friction and costs to enter the market.
The US Securities and Exchange Commission has said it is reviewing equity market structure, including payment for order flow. SEC chair Gary Gensler said in a speech in June that there is an uneven playing field among wholesalers, dark pools, and lit exchanges.
Gensler highlighted that more than 90% of retail marketable orders are routed to a small, concentrated group of wholesalers that pay for this retail market order flow. As a result institutional investors such as pension funds, are unable to interact directly with retail order flow. Therefore, he has asked staff to make recommendations for the Commission’s consideration around how to enhance order-by-order competition.
Payment for order flow came under heavy discussion on the first day of the Security Traders Association conference in Washington DC:
Hester Peirce, SEC commissioner:
Joseph Mecane, head of execution services at Citadel Securities:
Joe Wald, head of electronic trading at BMO:
Douglas Cifu, chief executive of Virtu Financial, also defended payment for order flow at the conference. He said US retail markets were the best in the world and the SEC should base any decision on data.
The winner in this game has yet to be decided – let’s hope it is the end investor.
