Mar. 31, 2023
The US market should be competitive however there have been concerns regarding conflicts of interest among market participants. One issue that could easily be addressed is the requirement for orders to go to a public auction before reaching market makers or other middlemen. This would provide more transparency and give everyone an equal opportunity to fill orders and compete in a market which is closer to fair and honest. It is worth noting that the UK has already banned Payment for Order Flow (PFOF) due to conflict-of-interest concerns, and the US should follow suit. There have also been concerns regarding the quality of execution and price improvement for retail investors dealing with PFOF. A recent study found that Robinhood does not provide statistically significant price improvement relative to exchanges, despite PFOF being responsible for around 70% of its revenue. This violates FINRA's Best Execution guidance, and the SEC should ensure that brokers comply with these rules or are punished appropriately. Rules put in place are only as effective as their enforcement. There have been calls for higher fines and stronger penalties for those who break the law, broker-dealers should lose their licenses instead of receiving fines that amount to a cost of doing business. The SEC should investigate conflicts of interest among market participants to ensure that participants can objectively review the rules. There are clear examples of market makers also operating brokers to effectively navigate both sides of the trades themself. Overall, ensuring fair competition in the market and addressing conflicts of interest should be a top priority for the SEC. The proposed rules to increase transparency and reduce the influence of middlemen on the market should be implemented as soon as possible.