Payment for Order Flow in Focus


The US Department of Treasury recently recommended that Securities and Exchange Commission should consider banning access fee rebates and payment for order flow if an access fee pilot demonstrates that it would not harm market quality.

However, some regulators at the state level are not waiting for the results of an eventual two-year pilot before acting. According to a recent report in the Financial Times, the securities division of the Massachusetts Attorney General’s office has an open investigation concerning the practice of payment for order flow.

In the meantime, one leading retail broker suggests that sunshine is the best disinfectant.

Walter Bettinger, Charles Schwab

“Our focus is on transparency and disclosure,” said Walt Bettinger, CEO of Charles Schwab, on the firm’s earnings call. “We really would like to get to a point where the consumer can understand the exact price improvement that they received on a particular trade as well as any payment for order flow that was compensated to the retail brokers. That type of transparency would ensure that consumers are in a position to compare organizations.”

Bettinger has maintained the same position for the past several years, ever since Michael Lewis’ book, Flash Boys, brought payment for order flow and high-frequency trading into conversations of retail investors.

Being able to provide such transparency would entail a significant technology investment, which Charles Schwab has investigated, he noted.

“In many ways, I think that would be the optimum resolution to this issue,” said Bettinger. “Often transparency is that.”

He also commented that an increased transparency around payment for order flow would help educate more than just investors and regulators about market dynamics.

“It would also invite the press and others into a deeper understanding of the balance between price improvement and payment for order flow,” Bettinger added.

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