SEC Chairman Gary Gensler says that he is asking the regulator to look into a ban on Payment for Order Flow, the shady practice first started by Bernie Madoff to power his 50 Billion Ponzi scheme which was partly responsible for triggering the 2007/08 financial crash, and which netted him a cool 150 years behind bars as a result.
This is exceptional news for those of us who want to see a totally free and fair market, because this is one of the techniques which has been used by Citadel to increase its dominance as the world's leading market maker.
Gensler told the Senate Banking Committee that he’s concerned about Citadel Securities’ 47% market share over all U.S.-listed retail volume. Virtu Financial (VIRT), another wholesaler, controls about 25% to 30%.
“I’m pro competition, and I’m not sure the payment for order flow system really is the best competitive landscape,” Gensler said.
Gensler did not mention Citadel Securities by name, but the company was mentioned in the footnotes of prepared remarks submitted by the SEC chair.
SEC mulls ban on Payment for Order Flow
The SEC has not ruled out the possibility of a full ban on payment for order flow, the practice of a brokerage (like Robinhood) passing on stock orders to a wholesaler (like Citadel Securities) to actually locate and execute.
“I think the inherent conflicts of payment for order flow and rebates on the stock exchanges both may make our markets less efficient,”
Gary Gensler, SEC Chairman
Yahoo Finance reported that Gensler raised the issue of concentration of retail order flow in the first meeting of the White House’s Competition Council last Friday, President Joe Biden’s initiative to push federal agencies to curb anti-competitive behavior.
After being ordered Capitol Hill to testify after the run-up in GameStop froze some trading activity, Citadel Securities’ Ken Griffin said payment for order flow has been helpful to the brokerage industry and the retail investor at large, although he would say that, having benefitted from it enormously. The fact is that PFOF is ultimately destructive because of the potential for manipulation and the monopoly it has created.
“This has been very important for the democratization of finance, it has allowed the American retail investor to have the lowest execution cost they’ve ever had in the history of the U.S. financial market,”
Ken Griffin
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