EU Member States Vote Against Ban on PFOF Trades: Report
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EU Member States Vote Against Ban on PFOF Trades: Report

EU member states rejected the previously proposed ban on PFOF trades.
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EU member states have rejected the ban on payment-for-orderflow (PFOF) trades, which allow brokers to earn fees by routing share trades to specific market makers, according to a Reuters report. The ban was suggested by the European Commission as part of its draft law aimed at revamping the bloc’s stock market.

PFOF Trades Avoid Ban in the EU

Member states of the European Union (EU) have voted against plans to ban brokerage firms from earning fees by directing share trades to select trading platforms, also known as payment for order flow (PFOF). The ban was proposed as part of the extensive stock market overhaul in the bloc to help compete with London in the post-Brexit era.

The ban represents a portion of the draft law put forward by the EU’s executive European Commission, known as MiFID II, that seeks to make it easier for companies to secure new financing on markets. However, EU member states rejected the ban on Tuesday.

“The regulation leaves a discretion to member states to allow this practice only on their territory.”

– representatives of the EU member states said in a statement.

PFOF refers to a compensation brokerage firms receive for routing trades for execution to a specific market maker. It is more common in the options market, however, it has been becoming gaining traction in stock trading in recent years.

PFOF share trades have become particularly popular at the start of 2021 when an abundance of retail investors pumped the so-called “meme stocks” like GameStop and AMC Entertainment, among others. During the meme-stock frenzy, investors used brokers that touted for business by charging no fees, but rather generating profits by routing orders to specific market makers.

Following the ban rejection, EU member states are set to discuss the final agreement with the European Parliament, which means further changes to securities rules are likely. In addition, the states also agreed to alleviate restrictions on the so-called dark trades, used by major investors who prefer trading blocks of shares.

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The SEC Scraps Plans to Ban PFOF Share Trades in the US

The move by EU member states comes soon after the U.S. Securities and Exchange Commission (SEC) also backed off from a ban on PFOF trades. The PFOF model was targeted by the SEC’s rule introduced in June 2022.

Last week, the SEC voted to propose some of the largest changes to the US stock market structures in roughly 20 years. The changes seek to increase transparency and fairness while maintaining healthy competition between individual investors.

One of the proposed changes includes requiring marketable retail stock orders to be routed to auctions before their execution. This change would allow brokers to show they get the best executions for client orders, as well as reduce trading increments and access fees on equity exchanges.

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Do you agree with the bloc’s decision that PFOF trades should be allowed? Let us know in the comments below.