Views on improving the integrity of global capital markets
17 August 2016

Payment for Order Flow: UK Market More Competitive in Retail Trades After Ban?

Posted In: Market Structure

CFA Institute has just released the findings of a study on the impact of the Financial Services Authority’s (FSA), which is now the Financial Conduct Authority, rule clarification in 2012 that effectively banned payment for order flow (PFOF) arrangements in the UK retail equity market. The report is also summarized in a Policy Brief.



What is payment for order flow?

As noted in the video, PFOF is the practice of wholesale market makers paying brokers (typically retail brokers) for their clients’ order flow.

PFOF arrangements are a controversial topic in modern market microstructure with the balance between potential benefits and disadvantages being up for debate, as discussed the following videos.

What are the benefits of payment for order flow?

What are disadvantages of payment for order flow?

Avoiding agency conflicts and achieving best execution are important for investor protection and market integrity, which was the motivation for this study. By understanding the UK market before and after the PFOF ruling, other markets that currently permit PFOF, such as the United States, can be better informed about the benefits and disadvantages. In fact, the US Securities and Exchange Commission (SEC) is known to be looking at the UK experience to inform its own views on PFOF.

We examined the proportion of trades executed at, better than, and worse than the best price before and after the PFOF ruling.

What did our study investigate?

By calculating these statistics, we were able to determine whether the UK market has become any more or less competitive for retail-sized orders following the PFOF ruling in 2012. We found that the proportion of retail-sized trades in the United Kingdom executing at the best quoted price increased between 2010 and 2014, from around 65% to more than 90%.

What were our findings?

These findings have important implications for market structure policy.

What are the policy implications of our findings?

For more insight into the study and the issues surrounding PFOF in general, please view the Policy Brief as well as the original report.

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About the Author(s)
Sviatoslav Rosov, PhD, CFA

Sviatoslav Rosov, PhD, CFA, is Director, Capital Markets Policy EMEA at CFA Institute. He is responsible for developing research projects, policy papers, articles, and regulatory consultations that advance CFA Institute policy positions, focusing on market structure and wider financial market integrity issues.

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