The practice of Payment for Order Flow (PFOF) has come under scrutiny over the past month in the wake of the GameStop trading event. This perhaps explains why in the latest Acuiti Insight report, 49% backed a ban while 29% opposed and the remainder unsure.
PFOF is prohibited in several jurisdictions including the UK and Canada but is a major revenue generator for retail trading platforms in the US.
In effect, it involves a trading firm paying a broker in return for orders for shares or options from retail traders. Market makers such as Citadel Securities, Virtu Financial and Susquehanna agree in turn to execute the trade at or better than current market prices.
The market makers, which use computing power to execute trades at breakneck speed, have usurped the role of the traditional investment banks. They now sit on one side of more than three of every 10 trades that take place outside traditional exchanges, according to the Financial Industry Regulatory Authority.
Last month, a group of day traders in Reddit’s r/WallStreetBets forum, going by the monikers such as “dumbledoreRothIRA” and “Coldcutcombo69” — decided to execute a “short squeeze” by pushing up the price of GameStop and other targeted stocks in hopes of inflicting losses on hedge funds that have placed large bets on the same shares.
The surge in trading drove the video game retailer’s value up by more than $10 bn but then it came crashing down when several trading platforms placed temporary restrictions on the stock. The volatility not only impacted the US market but reverberated across UK and European markets.
Will Mitting, founder and managing director of Acuiti, said: “Greater scrutiny of the payment for order flow model might well be the lasting legacy of cacophony of commentary on the activities of certain retail traders in the US last month.”
The Acuiti Derivatives Insight Survey is a monthly update on the latest topics, revenues and outlook from the global derivatives markets drawn from responses to a survey sent to Acuiti’s Elite Network of hundreds of senior executives from across the market.
Unsurprisingly, the other hot topic was Brexit. The study reaffirms the trends seen in the past month with migration to the European Union. If found that traders were beginning to shift listed futures and options activities along with the well-publicised equity and swap movements.
In terms of liquidity, around a quarter of respondents reported a deterioration of liquidity in listed derivatives. They were all based in the UK and the majority were proprietary trading firms.