http://www.tradersmagazine.com/issues/20_287/102250-1.html?zkPrintable=true I hate options PFOF, since it doesn't typically go into the pocket of the maket taker. Eliminate all of these fees/incentives. Let exchanges compete strictly on price and convenience. Let the consumer route to the exchange of preference. This makes things as simple as possible, but not simpler. Note the high profile people fighting in this arena. There are scores more of boutique firms behind the scenes that stand to lose or gain based on what gets decided, if anything. If PFOF stands in the options market, enact a law that says the customer MUST receive that payment, not the Broker Dealer. Why on earth is this so hard to understand? Guess what, it isn't. The reason it is not law is that B/Ds eat the PFOF with zero risk to them. This is equally if not more lucrative than the comission they charge a customer! In fact, I am surprised there aren't any free comission option brokers out there. It is a scam.
Thanks for the reply. I understand, I just don't agree. You might be right about what rules the exchange should choose but I don't think things like that should be mandated without a strong reason. IMHO protecting small liquidity providers is not a strong reason. As I said before I think the exchange should be able to pay whoever it wants to. If they make a bad choice then volume goes elsewhere and they lose money, so it seems like they have the incentive to pick the right structure. And they are probably in a better position to pick the right structure than the government. As for legislating who gets PFOF I think that is equivalent to restricting competition on commissions. We tried that for a while with stocks and decided it wasn't a good idea. Maybe it is a coindicidence but liquidity seems to have improved since commissions were deregulated.
Actually it would protect everyone, not just the small liquidity providers. You think anyone likes paying PFOF whether they are a sole prop or SUSQ? Oh I agree completely. Too bad it is not the exchange that pays for order flow, it is the MM. The exchange just made the rule since it doesn't come out of their pocket, so why would they care? In equities the Market TAKER pays for liquidity, why don't people run to other places to do their business where they don't have to pay for taking liquidity? BECAUSE the spreads are tighter on ARCA, NSDQ, etc. So as I stated on the post you are responding to, if you eliminate PFOF, or, you leave PFOF but you give it to the liquidiity providers the way that BOX has done, you will tighten spreads, and then volume will come to you. If no exchange was allowed to suck money from MMs to pay for order flow, then non of this nonsense would exist. It reminds me of being at a stadium watching a sporting event. If everyone sits down, everyone can see. As soon as the guy in front of me stands up,I am forced to stand up, causing a cascade of people to be forced to stand up. We all see perfectly well when we are all sitting down. Some idiot exchange (PHLX ?) invented PFOF as if this would create some sort of lasting edge to them. Didn't they think everyone would follow suit? What a bunch of morons. I have no problem with PFOF if only ONE thing changed: the PFOF goes to the final customer. Look, if I open an account with IB, or SCHAWB, or Ameritrade, or TOS, or 99% of the option brokers in this nation, and I buy or sell a put by hitting a bid or an offer, do I see the PFOF? NO!!!!! Why not? I am the market taker, no? This one rule change would now remove the incentive of the broker to steal from their customer. How is that fair? To suggest otherwise is ridiculous. Instead what happens is the brokers and exchanges are in collusion with each other to route orders not to the best destination for the customer, but in order to suck the most profit from that order before it gets filled. Nice.
Ill concur all PFOF has done nothing but bad things for the market. Explain to me why pay for play is illegal everywhere but the option market??? http://www.option911.com
Ok, I am not explaining myself in a way that is being clear. Let me try a different approach. Let me try question/answer approach. Q: Do you believe that PFOF as it exists now (without the recnt BOX change in strategy) helps customers get a better price than without PFOF? Q: Or, if PFOF were allowed as it is now, but the PFOF is payed to the customer and not to the B/D, would this lower the cost to the customer? Q: Or, if PFOF was payed by the market taker instead of the MM, would MMs then likely compete by streaming tighter spreads, since they have a revenue stream that they can lean on to compete for orders? A: ?
The short answer is I don't know. Without knowing much about this market I would guess the third one. But I can imagine scenarios where the other two would be better. BTW this description sounds funny - I didn't think it is called PFOF when the MM gets paid a rebate. Is that correct? I thought historically PFOF evolved from the MM paying for good orders not likely to be informed, IOW PFOF is the liquidity provider buying market orders. So now there is payment for order flow made by (not to) the one who is directing the order flow? But more importantly my point is not that you are wrong about which design is better, but that I disagree with the idea of someone other than the exchange choosing a one size fits all design and imposing it.
I can tell you that as a former mm PFOF has driven away independent market makers, put all of the order flow in very few hands, encouraged internalization of order flow, limited innovation, and artificially kept several exchanges open (Iâm talking to you PSE AND PHLX)! There are other problems as well; it causes 'smart routers' to route to illiquid exchanges. It encourages your broker not to teach you about trading the big indexes vs. the etf's. The list goes on and on. This process has been good for the Option Expresses (Express's?), and TOS's, and that is about it. If the regulatory bodies understood the option markets (they donât), this type of practice would be as illegal as any other kind of bribe. http://www.option911.com