Mar. 31, 2023
I am an active, small-scale retail investor, and I’m writing to point out the positive effects of Payment for Order Flow. I am aware of the potential for conflicts of interest in PFOF. By the way, I am not affiliated with any broker/dealer. Here is some of what HFT and PFOF gives the retail trader/investor: 1. A few pennies of order improvement (sometimes). Hey, why not? Institutional investors get kickbacks from the exchange oligopolies. 2. Tighter bid/ask spreads. Between 1928 and 1999 the bid/ask spread average for the Dow Jones Industrials was 60 bps. HFT firms provide enormous liquidity and are working for a fraction of a penny. I’m not competing with them, not allowed to even if I wanted to, and I don’t want to. And if HFT firms didn’t have to pay for the order flow, does anyone really believe they would? 3. Because of payment for order flow, I pay $0 stock trade commissions, $1 option commissions to open, $0 to close. How’d you like to buy, say, a hundred shares of AAPL through some big brokerage firm and pay 1% commission? 4. I always use limit orders. Always. Anyone who doesn’t is willingly getting his pocket picked. Traders and brokers use market orders because they don’t want to bother with working the order. I know about Best Execution, but how would you determine whether you got it, and if you did find out what are you going to do about it? Do people really believe that their broker/dealer is going to make a complaint? To whom? Do they believe the oligopolies are going to do anything about their little retail trade? 5. I get real time data feeds. Seems obvious but it used to be you had to pay for real time data, otherwise there was a 20 minute delay. Why would that be? Does it cost more to provide real time data? My cynical theory is that since you really can’t use a limit order, you don’t know where the market is, you have to use a market order. Get your pocket picked. 6. Used to be the “discount brokers” charged extra for a limit order, so you’d use a market order. Pocket picked. The HFT firms care about me about as much as I care about them, but PFOF is like revenue sharing for the retail investor, something we will never get from the oligopolies. The exchange fees are more than the commissions. Eliminate PFOF and costs for the retail investor will increase substantially. Institutional investors should be able to take of themselves, though they do whine a lot. The way to manage potential conflicts is to require broker/dealers to audit the market makers with whom they are doing business, not to eliminate PFOF. Phil Hanson Sent from my iPad