ASIC Chairman PFOF
(Australian Securities and Investments Commission Chairman Joseph Longo)

Australia’s top market regulator warily eyes PFOF model

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Australia’s chief financial watchdog is looking to amend payment for order flow (PFOF) curbs
aiming to include arrangements between non-market participant intermediaries.

Payment for order flow (PFOF) is the compensation a broker receives for routing trades for trade execution. During its entire existence, the practise has been criticized by some as creating unfair or opportunistic conditions at the expense of retail traders and investors.

The Australian Securities and Investments Commission’s (ASIC) “has identified that its rules do not deal with certain payment-for-order-flow scenarios such as arrangements between non-market participant intermediaries and proposes to close this regulatory gap” the regulator said on Wednesday (August 25).

“Payment-for-order-flow arrangements create conflicts of interest that can lead to poor client outcomes. It can also negatively impact market liquidity and pricing. In our view, these harms outweigh the benefits” ASIC added.

The practice of PFOF is not prevalent in the Australian equity market, however there is continued growth of PFOF in major markets and has attracted the attention of several regulators.

In the U.S., after the trading frenzy in stocks such as GameStop earlier this year, the Securities and Exchange Commission began scrutinizing PFOF over concerns it might incentivize brokers to send customer orders to places that maximize their own profit, rather than to places that would provide best execution to customers.

California-based online broker Robinhood Markets Inc. known for helping pioneer commission-free trading, faced hefty fines from multiple US regulators for failing to protect its clients’ interests.

In its recent IPO filing, the company disclosed that 81% of its first-quarter revenue came from the controversial PFOF practice.

In the European Union (EU), regulators revealed their stance against the PFOF business model and warned that it is not compatible with the existing MiFID II rules.  MiFID II is a legislative framework instituted by the EU to regulate financial markets in the bloc and improve protections for investors.

PFOF is banned in Canada and the UK.

The ASIC said it would seek feedback on its proposals until Nov. 3. After considering the feedback, it publish a feedback report and, if ASIC chooses to proceed, it will submit the amended rules for Ministerial consent.

ASIC is an independent statutory body that is responsible for regulating financial markets, securities, futures and corporations as well as being responsible for consumer protection in relation to superannuation, insurance and banking.

Joseph Longo, who has more than 38 years experience in corporate law, financial services, governance and regulation in Australia and overseas, commenced as ASIC Chair on 1 June 2021 for a five‑year period.