European regulators may be on the verge of easing proposed restrictions on payment for order flow (PFOF), a panel of regulatory experts from TradeTech has revealed.

Speaking at the panel, the head of the securities markets unit at the European Commission, Tilman Lueder, hinted that regulators may need to ease restrictions on the PFOF.

The Commission proposed to ban order flow payment for “SI-organized high-frequency traders” as part of its capital markets union update in November. As part of the changes, sites will instead have to gain retail order flow by posting competitive pre-trade quotes in another move to level the playing field between execution sites.

“Since we proposed this ban, we have learned a lot. Anyone who proposes legislative changes to the PFOF will hold themselves hostage to fortune. You start with big ideas but you find out a lot of details about how it’s used in different markets and I think it’s fair to say that PFOF is used in a different way in Europe and the US” , Lueder told the crowd.

“Some member states see the PFOF as a positive because it allows smaller platforms to aggregate order flow and execute them outside of the big exchanges and in terms of explicit costs it is certainly cheaper and in terms implicit costs which are subject to debate. If companies want to prove they are getting the best execution and lower implied costs, we need a voluntary quote band and a full quote band. »

Payment for order flow is also a hot topic on the agenda of regulators in the United States, with potential limitations also expected to be imposed by SEC Chairman Gary Gensler. Also speaking at the main regulatory panel, former SEC commissioner and executive director of the Milken Institute Center for Financial Markets, Michael S Piwowar, said an outright ban was not likely but that new limitations were inevitable.

“We had the commercial frenzy around GameStop in January 2020, then we had the Congressional hearing and the PFOF became a big deal. Doing nothing is not an option, it [Gensler] must do something. An outright ban is not on the table. One of the unintended consequences of this is that we’ll probably end up losing 0 commission, so people will end up paying more,” he said.

“There will probably be some sort of enhanced disclosure with the stats around 605 and 606. You can’t do it broker-by-broker or stock-by-stock. It was very uncontroversial. It will be disclosures plus something else to appease those who want a ban. This could be payment limitations for order flow or limits on exchange access fees, etc.

Other U.S. limitations potentially on the horizon could also include reducing tick sizes or raising the threshold for exchanges to qualify as a protected listing, moderator Ari Burstein, general counsel and director of policies at Imperative Execution and panel moderator, added.

Data is another key area of ​​regulatory debate on both sides of the pond. Regulators in Europe and the UK have moved to investigate rising market data costs and concerns about competition between market data providers.

In the United States, the SEC implemented the Data Infrastructure Rule in December 2020, including changes regarding odd lot trading and accounting data depth.

“Once you get past that in terms of market data revenue, you have the big picture and it goes beyond the data. Fights between pre-profit exchanges which are also self-regulatory bodies and then brokers,” Piwowar said.

“When the governance around the NMS plans and the national market system was put in place, it didn’t consider for-profit trading, there wasn’t the conflict of interest that there is now. These should be dealt with as you get the natural evolution of governance in the market.

For Tilman, changes to crypto regulations in Europe and the development of market structure projects, including a DLT pilot program, could improve trade data.

“It’s the aggregation of a very fragmented market. Crypto would actually serve as a market integration tool, so we want to have a few projects with a simplified legal framework,” he said.

“If a new technology comes along that simplifies the dissemination of data, the trading process, the clearing process, the settlement process, that’s a good thing. Crypto and DLT could also allow us to have better access to the trading data itself.