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to search the market for the real best price. My experience indicates that the above percentages for payment for order flow are not unusual. In many other discount brokerage firms, revenues received from payment for order flow may even exceed this 22 percent amount. |
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Payment for order flow was an embarrassment for the now well-informed SEC. On the one hand, the new SEC would probably like to see payment for order flow go away. On the other hand, it is difficult to eliminate a policy that the old SEC had been condoning and has flourished for so long as to have entered the molecular structure of the market. Payment for order flow is so ingrained in the market system that its sudden elimination could be very disruptive to the market structure. The SEC may believe that its new Order Handling Rules will cure the blight of payment for order flow. Although the original concept of an eighth-of-a-point minimum spread did not solve the problems, the sub-eighth pricing (sixteenths and thirty-seconds) is doing the job far sooner than even I anticipated. Decimal pricing in pennies is on the immediate horizon. These dramatically reduced spreads will be so thin that market-maker profit margins will be squeezed to the point where the economics of payment for order flow will surely spell its demise or at least reduce it to where it may become inconsequential. Market makers are already facing reduced profit margins and in several cases have ceased to pay for order flow on limit orders. |
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The SEC's reasoning was to free the market so that the public would enforce its own economic self-interest by placing thousands of limit orders in between the spreads, thereby creating a truly tight spread and highly liquid order-driven marketa new market that would no longer be able to support large payments for order flow, thus legitimizing the market without any significant structural disruptions. This was a plan so well conceived that I wish I could take credit for it. |
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A recent article from the Wall Street Journal reported that market makers are reducing the number of stocks in which |
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