Citing concerns about the rise in “payment for order flow” arrangements (particularly in the U.S.), the Australian Securities and Investments Commission (ASIC) is seeking to tighten its rules against the practice.
The ASIC issued a consultation paper on proposed rule changes that aim to close possible gaps in the existing rules regarding the practice of brokers selling retail investor order flow.
While the practice is prohibited in the Australian market, as it is in Canada, the regulator said that it has determined that its rules don’t deal with certain payment-for-order-flow scenarios, “such as arrangements between non-market participant intermediaries.”
As a result, the ASIC is seeking to close this regulatory gap — and to simplify the concept of “negative commission” in its rules.
“ASIC’s proposed amendments are a proactive measure intended to avoid the emergence of payment for order flow arrangements in Australia,” it said in a release.
The regulator added that these arrangements “create conflicts of interest that can lead to poor client outcomes,” also saying, “It can also negatively impact market liquidity and pricing. In our view, these harms outweigh the benefits.”
The practice has come under increasing scrutiny in recent months, with the rise of zero-commission brokers that generate revenue by selling their retail clients’ order flow, rather than charging them to trade.
In Canada, where payment for order flow is also already banned, the Ontario Securities Commission (OSC) has raised concerns about brokers providing ultra-cheap trading by generating their revenue through foreign exchange fees that may not be well understood by investors.
The ASIC’s proposals are out for comment until Nov. 3.