The European Commission is planning to ban payment for order flow, paralleling potential U.S. moves to stem a practice that hit the headlines during the meme-stock mania.
A forthcoming review of the Markets in Financial Instruments Directive will include a ban amid other measures to increase transparency, such as a consolidated tape of information about transactions, people familiar with the matter said.
The U.S. Securities and Exchange Commission is separately weighing a ban on payment for order flow, in which trading firms pay retail brokerages to execute their trades. Regulators are concerned that video-game like prompts have encouraged excessive trading on app-based brokerages that fueled a explosive surge in value for GameStop Corp. and other stocks this year.
While the day-trading frenzy is far more muted in Europe than the U.S., the practice of zero-commission trading is starting to cross the Atlantic. That prompted the bloc’s markets watchdog to warn firms and investors in July of the risks arising from payment for order flow.
A spokesperson for the European Commission declined to comment.
Mairead McGuinness, the EU’s financial services commissioner, said this month regulators were “closely monitoring” payment for order flow. It was difficult to assess how problematic the practice is “because there is no consolidated view of all liquidity and prices of financial instruments traded across execution venues in the European markets.”
McGuinness said the payment for order flow “may lead to retail orders not being executed on terms most favorable to the client but instead on the terms most profitable to brokers,” according to a written response to a question from a European Union lawmaker.
“This would not be in line with the second Markets in Financial Instruments Directive,” she said. It’s also why regulators are “considering proposing legislation to facilitate a consolidated tape that provides all brokers and their clients with such a holistic view” of all liquidity and prices of financial instruments traded across execution venues in the European markets.
Consolidated Tape
The EU is planning to set a separate tape for each asset class, according to the people familiar. Details on delivery, specifications and speed would be set out later. There may be a tender process to choose the provider of a consolidated tape for an asset class.
The current draft notes a 15-minute delay to consolidate the data will remain acceptable, echoing current rules where exchanges should provide their data for free after 15 minutes. Those contributing data to the tape would share its revenue if the tape consolidates data in less than 15 minutes.
