EU wrestles with Payment for Order Flow share trading rules

5:16 pm Thursday, November 17th, 2022

By Huw Jones

LONDON (Reuters) – European Union states edged closer on Thursday to ditching a proposed ban on brokers earning fees in return for directing stock trades to specific trading platforms.

Payment for order flow (PFOF) drew scrutiny last year when an army of retail investors flocked to ‘meme stocks’ on Wall Street, using brokers who touted for business by charging zero fees, making money by sending the orders to an agreed venue for execution.

The United States is considering whether curbs are needed for PFOF while the UK has already banned it.

The EU ban was proposed in a draft law by the EU’s executive European Commission updating the bloc’s MiFID II securities law, with EU states and the European Parliament having final say.

Building on German and French suggestions for continuing to allow PFOF but under strict conditions, the Czech presidency of the EU set out an informal compromise at a meeting of EU member state officials on Thursday.

A broker receiving payments from a trading platform must equal or improve on the stock price offered in the wider market, the compromise seen by Reuters says.

To make this possible, a separate proposal in the MiFID draft law to create a ‘consolidated tape’ to record stock prices across the bloc’s multiple trading venues, would likely need to include offered prices and not just prices of completed trades, an addition exchanges are battling against.

Separately, the European Parliament’s economic affairs committee also debated PFOF on Thursday, with lead lawmaker Danuta Huebner saying the committee is split between those who want to allow PFOF under strict conditions and those who back the ban.

“Here we have one of the most difficult discussions looking for a compromise,” she said.

The Federation of European Securities Exchanges (FESE) said discussions on PFOF and consolidated tape risk “cementing fragmentation and opacity” in markets.

However, Huebner said competitiveness of EU markets is essential given competition from Britain and the United States.

“We have to take competitiveness very seriously from the point of view that we remain attractive, and that capital will not flow to London due to Brexit,” Hubner said.

Separately on Thursday, the EU’s financial services chief Mairead McGuinness set out further plans due next month to boost EU capital markets, partly in response to Brexit.

(Reporting by Huw Jones;Editing by Elaine Hardcastle)