The European Union plans to ban a practice that allows brokers to offer zero-commission transactions to clients by earning a fee from forwarding their orders to larger trading platforms.
(Bloomberg) — The European Union plans to ban a practice that allows brokers to offer zero-commission transactions to clients by earning a fee from forwarding their orders to larger trading platforms.
The general ban on payment for order flow was included in a wider package of reforms on which EU member states struck a provisional deal with the European Parliament on Thursday. Zero-commission trading is a key selling point for digital brokerages that have sought to challenge traditional banks.
The meme stock mania of 2021 raised concerns among regulators that retail orders were being executed on terms that were more favorable to brokers rather than clients. The issue is smaller in Europe than in the US, where retail investor participation in stock markets is higher.
In the US, proposals from the Securities and Exchange Commission “seek to limit this retail broker-wholesaler relationship, and if passed intact will likely sharply decrease” payment for order flow, according to Bloomberg Intelligence.
What Bloomberg Intelligence says:
SEC market-structure proposals to alter retail trading are the greatest threat to industry PFOF. New regulations won’t be implemented for a couple of years at the earliest, and retail brokers and wholesalers will fight the changes in court, arguing the current regime is fair and benefits individual investors.
-Larry R Tabb, BI Director of Market Structure Research
Click here to read the full report.
European states would still be allowed to exempt investment firms from the ban under certain conditions until mid 2026, the European Council said in a statement.
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