Payment For Order Flow & The SEC’s Plan To End It
The bigger issue here is spoofing-it really doesn't make a difference if you make this order flow public via an "auction process or a bidding procedure" as they are describing-you have to address the fake orders-that are never filled that are placed to try to influence market direction.
What they (SEC) need to do to solve that is get rid of the kickbacks that the market makers pay to PLACE orders-this and then CHARGE them to PLACE those orders-only when you disincentivize and demonetize this entire process you'll be able to claim you can fix it but until you start charging them to PLACE the orders spoofing will still habben and you'll just be able to see it and the SEC will still do nuffin.
see here >>135898 Nasdaq, NYSE Dealt Blow in Clash With SEC Over Market-Data Feeds-deal wif 'spoofing' "Gary" otherwise this is useless
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“Payment For Order Flow” remains a contention between retail investors and Wall Street. On the one hand, it creates the ability to have “free trading” for retail investors. However, it also creates an opportunity for Wall Street to “front-run” individuals for profit.
In financial markets, “Payment For Order Flow,” or “PFOF,” refers to a broker’s compensation from third parties to influence how the broker routes client orders for fulfillment. For years, paying for order flows allowed firms to centralize customers’ orders for another firm to execute. Such allowed smaller firms to use economies of scale of larger firms. Such enables small firms to combine orders with larger firms, providing better execution quality.
Over the years, the decimalization of the trading securities diminished the profitability of trade execution. Such pushed Wall Street toward payment for order flow as a way to generate revenue and subsidize the move to zero commissions. Technological advances and data analysis increased the speed with which information gets sent and received. Over the last decade, Wall Street spent billions to figure out ways to take advantage of the data and “game the system.”
Today, Robinhood and others generate the bulk of their revenues from payment for order flow by selling orders to the highest bidder.Citadel Think about this carefully. If a firm is selling order flow to the highest bidder, even though you are paying “zero commissions,” you are not necessarily getting the best execution.Protip: yer not-this been a problem even before High Frequency Tradinf (HFT)
The issue of payment for order flow is not a new thing. In 2004, Citadel’s attorney Jonathan G. Katz wrote a letter to the SEC making a definitive argument the practice of selling order flow should be illegal-and yet this is one of the most profitable arrangements that Citadel has.'''
Think about that for a moment.
In 2004, Citadel argued that payment for order flow should be illegal to the SEC.
In 2020, Citadel is the largest firm in the payment for order flow business. Citadel decided that “if you can’t beat ’em, join ’em” was the best game plan. What happened between 2004 and 2020?
'''During the waning days of fractional pricing, the smallest spread was ⅛ of a dollar, or $0.125-and this stopped-fractional trading in July of 2001-just in front of 911...not a coincidence.. Spreads for options orders were considerably wider. Traders discovered “free” trades cost them quite a bit since they didn’t get the best transaction price. At that point, the SEC did step in to conduct a study. The result was a near ban on payment for order flow. The study found, among other things, that the proliferation of options exchanges narrowed spreads due to the additional competition for order execution. In the end, under pressure from Wall Street, the SEC acquiesced and allowed the practice to continue stating: “While the fierce competition by increased multiple-listing produces immediate economic benefits to investors in the form of narrower quotes and effective spreads. By some measures these improvements get muted with the spread of payment for order flow and internalization.”
That decision opened “Pandora’s box.* “As is clear from the billions paid for, and made from, order flows, there is no such thing as ‘free trading.’ Thus, the claim of ‘commission-free trading’ is no more than a rhetorical ruse to attract new investors. Such distracts them from the billions of dollars in PFOF and other hidden costs that come out of retail investors’ pockets.
These intermediaries are often merely transferring the investors’ visible upfront commissions into invisible after-the-fact de facto commissions. Such enables the complexity of the fragmented order processing system that one could argue is designed primarily to hide those payments.” – Better Markets
Such is why Wall Street lobbies the SEC heavily to look the other way. They also continue to obfuscate the “racket” under the guise of “creating market liquidity.” However, liquidity would remain in a world without payment for order flow. Wall Street would merely shift focus back to market-making. But, if you don’t think this is a “big deal,” you are sorely misinformed. “Brokerages such as Charles Schwab Corp., TD Ameritrade, Robinhood Markets Inc., and E*Trade collected nearly $2.6 billion in payments for stock and option orders. The biggest sources of the payments were electronic trading firms such as Citadel Securities, Susquehanna International Group LLP andVirtu Financial Inc.” – WSJ
'''By FAR the biggest one is Virtu Financial see here: >>131956 pb Without Registering as Stock Exchanges, Citadel Securities and Virtu Financial Account for More Stock Trading than the New York Stock Exchange
and here all pb: >>136105, >>136107, >>136109 CFTC Orders Glencore to Pay $1.186 Billion for Manipulation and Corruption + Glencore co-founder Marc Rich/James Comey Clinton Foundation and Market Rigger Virtu Financial all connected
“Such firms make money by selling shares for slightly more than they are willing to buy them, and pocketing the price difference.” So, exactly why would firms pay for order flow? They are willing to pay for order flow from online brokerages because they are less likely to lose money trading against individual investors than on an exchange, where traders tend to be larger and more sophisticated.” – WSJ
Once again, the SEC is looking at fixing the payment for order flow practice.
“Right now, there isn’t a level playing field among different parts of the market: wholesalers, dark pools, and lit exchanges. It’s not clear, given the current market segmentation, concentration, and lack of a level playing field, that our current national market system is as fair and competitive as possible for investors.” – SEC Chairman, Gary Gensler
The Wall Street Journal went into more detail about what was currently getting considered:
“Chairman Gary Gensler directed SEC staff last year to explore ways to make the stock market more efficient for small investors and public companies. While aspects of the effort are in varying stages of development, one idea that has gained traction is to require brokerages to send most individual investors’ orders to be routed into auctions where trading firms compete to execute them. The most consequential change being discussed would affect the way trades are handled after an investor places a so-called market order with a broker to buy or sell a stock. Market orders, which account for the majority of individual investors’ trades, don’t specify a minimum or maximum price the investor is willing to pay. Mr. Gensler has said he wants to ensure that brokers execute orders at the best possible price for investors—the highest price for when an investor is selling, or the lowest price if they are buying.” – WSJ
The SEC is considering an “auction market” that would force firms to compete with each other to fill an individual investor’s trade*. That change would impact how firms like Citadel Securities and Robinhood Markets process retail trade orders. Now you can understand that “free trades” weren’t that “free” after all.
*An Auction like the US Treasury debt sales that masquerade as Auctions?--sorry that not gonna work-they'll just game that to make it appear legitimate-It's a different process for that but the mechanics are not very different-it's the same basic premise and they want to apply that to Equity orders.
And ANYTHING that Gary Gensler is for you know it is NOT for you-they are busy right now trying to pick the winners and losers in the crypto markets-they all should lose but that is a personal opinion...Tether has never had the money (1:1) it claims to so they'll just take them out and make it look organic and finally make them admit that all those exchanges are nothing but phony trades-and that doesn't address the entire "value" of cryptos in general..different argument for different day.
They all went to "free-trades becasue that only increases the amount of trades people make since "it's free"-thus the PFOF problem is only a richer moar profitable stream of revenue for them.
moar here and does cover the psychology of free trades=moar trades
https://realinvestmentadvice.com/payment-for-order-flow-the-secs-plan-to-end-it/