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While the emergence of “zero-commission” brokers has made investing more accessible to retail investors, underlying practices — such as buying and selling order flow — continue to raise investor-protection concerns among regulators.

Recently, Canadian and U.S. regulators have expressed concerns about the rise in retail investor trading, particularly among novice investors trading on mobile apps at little or no commission. Now, the European Securities and Markets Authority (ESMA) is joining that chorus.

On Tuesday, ESMA issued a public statement highlighting its concerns about the practice of brokers selling their clients’ order flow to other firms for execution.

So-called “payment for order flow” is banned in Canada, but is common in the U.S., where it has started facing greater regulatory scrutiny.

European regulators are now seeing the practice in their markets. While payment for order flow isn’t banned in Europe, ESMA said “in most cases, it is unlikely” that receiving payment for order flow would comply with the current trading rules, known as MiFID II, including firms’ best execution obligations.

In fact, the regulators stressed that the practice creates a “clear conflict of interest between the firm and its clients, because it incentivizes the firm to choose the third party offering the highest payment, rather than the best possible outcome for its clients when executing their orders.”

Given these concerns, the regulators called on firms to ensure that any arrangements with executing brokers complies with the regulatory requirements.

In particular, they stressed that firms must pay specific attention to the risk that receiving payment for order flow could affect bid-ask spreads and the prices that clients receive.

ESMA also warned firms against efforts to get around best execution rules by offering clients a list of potential execution venues and inviting them to chose their preferred venue, but presenting these choices in a way that favours firms that provide payment for order flow.

“This practice raises investor protection concerns,” the regulator said. “In ESMA’s view, such a choice does not constitute a proper specific instruction from the client.”

The statement also reminded dealers of their disclosure obligations to clients, and that firms that provide portfolio management can’t accept third-party compensation in the provision of those services.

Specifically, ESMA warned zero-commission brokers against advertising their services as free to investors, indicating that this could violate their disclosure obligations and “could incentivize retail investors’ gaming or speculative behaviour due to the incorrect perception that trading is free.”

Given these concerns, ESMA is calling on national regulators in Europe to prioritize reviewing these practices in their compliance reviews this year and in early 2022.