GameStop probe will subject brokerage firms to scrutiny over “payment for order flows”, according to CNBC. The scrutiny follows an increase in retail trading whereby some brokers receive payments from market makers or dealers for routing trades to them.
- Concerns have been raised that the payment for order flow has disadvantaged retail traders since the execution costs can outweigh the benefits of the so-called “commission-free trading.”
- Market observers also point that payment for order flows causes an inevitable conflict of interest between the retail broker-dealer’s duties to seek best execution for customers and its responsibilities to shareholders and others to maximize returns.
- The New York Stock Exchange has raised concerns that retail trades routed via “dark” venues like broker-dealers are dwindling liquidity for institutional investors and degrading the price discovery process.
- Bloomberg Intelligence’s Larry Tabb and Jackson Gutenplan refute claims that retail investors are disadvantaged by payment for order flows.
- Proponents of broker-dealer venues point out that payment for order flow benefits equity investors by improving execution quality and price improvement.
Retail trades almost doubled to 22.8% by the end of December 2020 from 13% in December 2019.