CRS Reviews Proposed Restrictions on Payment for Order Flow

The Congressional Research Service reviewed the SEC's recent proposal that would impact payment for order flow ("PFOF") by wholesalers with the aim of "bring[ing] greater competition in the marketplace for retail market orders." The CRS study cited arguments from both supporters and critics of the SEC proposal.

As previously covered, the proposed rule would, among other things, prohibit "restricted competition trading centers" from executing segmented orders for NMS stocks internally, unless the order was first subject to market-wide competition in a "qualified auction."

CRS said proponents of the proposal, which include the SEC, some NYSE officials and several retail investor advocacy groups, argued that the enhanced transparency and competition in order execution would allow retail investors to receive better execution prices. CRS also noted that supporters of the proposal believe it would "mitigate broker conflicts of interest by removing broker discretion on sending orders" and remove the current market advantage that wholesalers have over retail investors.

CRS said that the proposal's critics argued that the new rules are highly complex and would introduce new trading risks, including execution challenges and operational uncertainties, and would be too costly to retail investors relative to any potential benefits.