Mar. 15, 2023
March 15, 2023 I am writing to express my concern regarding payment for order flow (PFOF) and its impact on the duty of best execution. As a retail investor, I believe that PFOF is incompatible with the principles of fair and equitable trading. Numerous studies, including those conducted by independent academics and the Commission, have shown that brokers who accept PFOF receive less price improvement and have inferior execution quality. This practice undermines the duty of brokers to act in the best interest of their clients. Brokers who do not accept PFOF execute orders differently, resulting in better execution quality for their clients. I understand that some may argue that eliminating PFOF will lead to an end of zero-commission trading. However, this argument is baseless. Many brokers offer zero-commission trading without accepting PFOF, and other countries with trade-at rules or where PFOF is banned have zero-commission trading. The elimination of PFOF will not affect zero-commission trading. The negative impacts of PFOF on markets are well documented. PFOF leads to high liquidity fees and rebates, pushing take fees to the limit of the access fee cap and increasing costs for investors. Additionally, the principal-agent conflict drives brokers to place non-marketable orders at exchanges offering the highest rebates, rather than the best execution quality. This practice creates long queues, reducing the likelihood of execution and maximizing the likelihood of adverse selection. PFOF serves to increase the number of exchanges but decreases the number and diversity of trading participants, increasing concentration and subsidizing the largest high-speed trading firms to the detriment of other firms. Other countries, including the UK and Singapore, have taken steps to reduce or eliminate PFOF. The EU has also been pushing for a continent-wide ban on PFOF. These countries recognize that PFOF introduces conflicts of interest and compromises firms compliance with best execution. I urge the SEC to take action to eliminate PFOF and ensure fair and equitable trading for all investors. Despite the ad hominem attacks from PFOF proponents, it is critical to remember that nearly every one of these firms has endorsed nearly all the reforms for which WTI advocates in the past. It is time for the SEC to put the interests of investors first.