Almost all exchanges are operating on price-time priority meaning price first then time. Volume is not typically considered. Given that most trades happen in a 1 cent spread, it is not actually possible to compete on price, so all there is left is time. HFT heaven. The "shortest time" is inconsistent with a human centric definition of best execution that is relevant to retail. As a human you cannot really tell the difference between your order being executed in 1 microsecond or 1 second, even though the latter is 1,000,000 times as long as the former. You will definitely pay more for this "better execution" though. Mostly Agree. However matching liquidity takers with eachother when possible will always reduce total cost to liquidity takers as a group because competition will never drive the liquidity provider's price down to zero. You're right it depends on how the auctions would be implemented, but if you look at how auctions typically work on existing exchanges, the order book is completely hidden from the participants. Seems reasonable to assume that would also be the case here. So your solution is to straight-up ban PFOF and replace it with nothing. As I said before I think this would largely result in shift of profits from wholesalers to HFTs (many of which are actually the same entities). I agree it would probably be an improvement, but not as much of an improvement as the auctions system. That's because the current market structure is such that you can't compete against HFT unless you are HFT. Auctions enable competition much more effectively. Personally I think an ideal market structure would be having all orders from everyone going into centralized auctions. It's a pipe dream right now as it would mean putting all the exchanges out of business. But creating a retail only auction system could work, and over time this could eventually morph into central auctions for all. Could this be the SEC's real endgame? I won't get into rebates since that's a whole other big topic. What do you mean by "implement a threshold of minimum latency" ? I doubt it's that simple, but I'm curious if you've thought deeply on this. I've seen a lot of people opine on this and their solutions usually have all kinds of loop holes where speed still ends up being advantaged.
Brilliant analysis! If only the SEC had geniuses like KCalhoun in charge they would not neglect to consider important variables such as "So what if commission-free brokers gain a few cents per trade for pfof routing?" in their research on how to create the fairest structure for retail.
The issue with PFOF is not with the amount of commission. The issue with PFOF is threefold: 1) the amount of potential profit that you are losing or the potential loss that you are gaining due to not getting the best price 2) the inability to even know 1) above due to the lack of or total absence of transparency and 3) Loss of anonymity in terms of the trading position that makes us vulnerable to possible market manipulations to our detriment These far outweigh possible increases in trading costs and we don't even know how much.
I think it will depend on how the auction system is structured. More details should be revealed about the auction system, its mechanisms and its rules and etc. for us to assess its merit and suitability. The most ideal system imo is an automatic order-matching system like Island with no published traders ID with everybody's orders entered directly into the system and matched automatically with HFT banned so everybody starts at the same starting line at the same time. Under this system, the exchanges will be more cost-prohibitive for average retail traders so the exchanges will need to be subsidized. The way I see it, eventually we will all be trading on public exchanges owned by the government even with the DTCC taken over by the government. The way how DTCC behaved during the WSB meme stock phenomenon was despicable. They were the main culprit that directly caused all of the brokers to implement the anti-competitive restrictions on trading the meme stocks and yet they completely escaped scrutiny from everybody and weren't even questioned not even once during the Congressional hearing. But that's another topic for another time.