Petition To Ban PFOF In The US Exceeds 54,000 Signatures
In less than a week, a petition on Change.org, calling for a ban on payments for order flow (PFOF), has received over 54,000 signatures. The controversial business model helped Robinhood become the number one stock trading app by offering zero-commission trading; it works by directing orders to market makers who pay Robinhood a fee in return.
The controversy comes due to the unfair advantage, the petition argues, it gives to institutional investors who use “dark pools” to supress price when they are in a losing trade, “which goes against the concept of a ‘free market.’ “. Incidently, Bernie Madoff, creater of the world’s most successful Ponzi scheme worth $64.8 billion, was one of key figures behind the PFOF model.
Robinhood had become so dependent on PFOF that its stock dropped by 7% when Gary Gensler, the SEC Cahir, proposed the PFOF ban. In Q1 2021 alone, Robinhood earned 43% of its revenue from directing trade orders to Citadel Securities.
Citadel Securities vs. SEC
The petition further notes the suspicious use of dark pools in these practices. Shrouded in secrecy, The Tokenist had previously covered dark pools with Gensler saying that “half of [US] markets” go to dark pools. The petition also claims that on October 19, 2021, dark pool activity for AMC shares had reached 75%.
Furthermore, after the SEC decided to accept the IEX (Investors Exchange) proposal to institute D-Limit orders, Citadel Securities took the unusual step to sue its own regulator, claiming it did so in the interests of “millions of retail investors”. With the court date having been scheduled for October 25th, the petition makes a point of distancing the signatories from the concept of zero-fee trading.
“We don’t need Citadel speaking on behalf of retail investors to tell the SEC what’s best for us. Commission-free trading doesn’t help everyday investors when the US stock market is rigged and in favor of the wealthy.”
Alongside Robinhood, other brokers also make use of PFOF, such as Fidelity, TD Ameritrade, Charles Schwab, E-Trade, WeBull, and First Trade. Under SEC Rule 606, brokers are required to regularly report their routing to market makers on behalf of customers.
Case in point, here is the report from Fidelity for Q1 2021. The report shows that the bulk of Fidelity’s orders go to Citadel Securities – over 50% for market and marketable limit orders. The only brokerage free of PFOF appears to be Interactive Brokers (IBKR), relying on PRO-tier accounts with their monthly $10 subscription and a $0.005 per share charge.
Interestingly, IBKR founder, Thomas Peterffy, previously claimed the SEC won’t ban PFOF. He stated that in such an eventuality, Citadel Securities would end up buying Robinhood alongside other brokers.
“If they were to prohibit payment for order flow, what has to happen is you would have Citadel [Securities] buy Robinhood and Schwab would buy Virtu, and the two sides would be put together into one company.”
With D-Limit orders on the table as a corrective measure to introduce more competition for high-frequency arbitrage, this would subdue Citadel Securities’ dominant position.
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What Is The Success Rate of Change.org Petitions?
Although initially launched as a non-profit, Change.org turned into a for-profit company, purportedly with over 400 million registered users across 195 nations. For 2020, these are the petitions with the highest number of signatures.
As you can see, the company acts as a social signaling device, letting the public and politicians know which topics have gained traction and are in a need of redress. As such, at least the SEC will be informed that Citadel Securities’ claim of “protecting investors” holds little public sway as D-Limit orders take hold in leveling the stock market playing field.
Do you think Citadel Securities will be successful in presenting D-Limit orders as a destabilizing factor for the equity markets? Let us know in the comments below.