Feb. 7, 2023
February 7, 2023 PFOF as currently implemented has the following issue: Hiding costs from unsophisticated investors Brokers act to ensure profitability of wholesalers Not all wholesalers providing best execution Hiding costs from unsophisticated investors makes them think trading is cost free, encouraging unwise and excess trading activity. If instead of seeing the bid/ask retail traders saw the midpoint of a security with the spread listed as the cost of the trade, they would at least understand where wholesalers profits come from. Unsophisticated investors know there is some cost of trading because they see wholesalers profits from their own trades, but they do not understand how. Hidden costs prevent investors from making informed decisions and leads to a lack of trust and the proliferation of conspiracy theories (see your other comment letters for a sampling). Brokers work to increase the profitability of wholesalers at the expense of their account holders. They do this through two methods: encouraging trading by unsophisticated investors and reducing or excluding trading from sophisticated investors. Brokers attempt to make trading as simple and easy as possible to encourage order flow from unsophisticated investors while hiding the costs of trading from the same investors. Brokers also have systems to monitor investors accounts and identify toxic order flow - order flow where the market maker loses money and the investor profits. Personally, one of my brokers informed me that my order flow was toxic and my trading activity was spiteful towards their market makers. It surprised me that my broker worked for the wholesaler and cared whether they were profitable or I was. I thought of them as a disinterested party in the transaction, but their economic interest was squarely aligned with the wholesaler. Finally, in specific circumstances different wholesalers do not provide execution as good as or better than the NBBO. In particular, looking over the last 30k trades I have done, my data shows Virtu and Citadel providing reasonable price improvement. However, Susquehanna has on average provided pricing worse than the NBBO across the roughly 3.5k trades I have done with them. With that level of consistent price degradation, it does not appear that my broker is fulfilling their obligation to find the best fill and Susquehanna is not actually improving prices. Traders should not be able to choose their counterparty. While casinos are allowed to kick out the sharps and only take bets from unsophisticated gamblers, allowing this same structure to permeate our capital markets encourages investors to think of trading as gambling, rather than a mechanism to allocate capital to businesses. This undermines the principles behind a capitalistic economy and exploits unsophisticated investors in ways they do not understand. The proposed rules will resolve these issues.