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they make markets because of the reduced spreads that have resulted in reduced market-maker profits. As market-maker profits erode, payments for order flow have been reduced and are presently affecting the profit margins of discount and on-line brokerage firms. The consequences to the customers are that those discount and on-line firms that rely on payments for order flow will now have to increase rates or cut their ever-diminishing services. In theory and in fact, brokerage firms will compete for consumers based upon comparison of fully disclosed real commission rates and value-added service. |
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The brokers who accept payoff for orders violate their fiduciary obligation to you, their client. No one who understands the underlying corruption of payment for order flow would deal with a broker who accepts it. Yet virtually every discount broker accepts these payments in the ordinary course of its business. These payments raise the real cost to you of the trade, in many cases far above the low commission rate you are promised. |
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It is virtually impossible for any DAET trader to operate a business through a firm that accepts payment for order flow. These firms almost never use SOES for immediate order execution or ECNs for bidding or offering your shares in between the spread. Some even have house rules against it. The discount broker depends on the order flow payoffs to survive, and "best" execution takes a sorry back seat to the broker's own profitability. |
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Direct Access Electronic Trading makes you a lean, mean trading machine with the tools you need both to make an informed trading decision and to have your order executed in the most cost-effective and efficient manner. I invite you to call your discount broker and ask whether that firm accepts payment for order flow from the broker on the other side of your trade. If the answer is yes, then you cannot trade with that firm because it is working with the other side of the transaction and is more beholden to the other side of the transaction than to you in contravention of its fiduciary duty to you. |
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