By James Langton
(December 19 – 10:35 ET) – The U.S. Securities and Exchange Commission has released a new report looking at the issue of firms paying for order flow.
The report was commissioned by SEC chair Arthur Levitt in July. The phenomenon of paying for orders emerged after options began to be listed on multiple exchanges. “With increased competition for options order flow, options market participants have begun to offer cash payments to brokers in return for brokers agreeing to route their customers’ order flow to them.”
Firms are obliged to seek the best executions for their customers’ orders, but paying for order flow creates a possible conflict of interest. The report by the SEC looks at current payment for order flow and internalization practices, and outlines how the practice of payment for order flow and internalization have affected order routing decisions and the execution quality of customer options orders.
Among other things, the report found:
- In March 2000, specialists paid brokers for 14% of the retail options orders sent to them. By August 2000, specialists paid brokers for over 75% of the retail options orders sent to them.
- From November 1999 to September 2000, options specialists paid over $33 million to brokers to induce them to route their customer orders to the specialists.
- The firms paying for orders have not passed the savings along to retail customers.
- Payment for order flow has had an impact on order routing decisions.